New inflation numbers have thrown a spanner in the works for the Reserve Bank’s planned path forward on interest rate cuts.
Australia’s Consumer Price Index (CPI) for July came in above expectations at 2.8% year-on-year – the highest level of headline inflation in 12 months.
Trimmed mean inflation, the bank’s preferred measure to consider when it comes to the cash rate, has also jumped to hit 2.7%.
While this is still within the Reserve Bank’s 2-3% target range, it is a notable uptick, having come in at 2.1% in June.
REA Group senior economist Anne Flaherty said the rise was worrying and shows any chance of rate cut in September has now gone out the window.
“Though today’s release was only a monthly indicator, and not the full quarterly CPI, the unexpectedly high rise does provide cause for concern,” she said. “Today’s data essentially rules out a cut before November."
Housing figures
While food and alcohol saw major prices rises year-on-year, housing came in as the largest contributor to the uptick in headline inflation, up 3.6% for July. This is significantly higher than the 1.6% rise recorded for the 12 months to June.
The jump reflects increases in electricity costs - which rose 13.1% in the 12 months to July as annual electricity price reviews came into effect.
REA Group senior economist Anne Flaherty warns not to expect a rate cut from the RBA next month. Picture: supplied
The timing of energy rebate payments in different states also meant New South Wales and Australian Capital Territory households had higher out-of-pocket costs for electricity in July, as they awaited the rebate to kick in in August.
Rents grew as the slowest annual rate since November 2022, gaining 3.9% in the 12 months to July, following a 4.2% rise the previous month.
New dwelling prices remained flat, rising 0.4% in the 12 months to July, as the soaring construction and labour costs of the past few years stabilise.
Keeping a close eye
The latest CPI data comes a day after the Reserve Bank’s release of minutes from its August meeting where the cash rate was cut to a 28-month low of 3.60%.
While the decision to cut after a surprise hold in July was unanimous, the board acknowledged it expects headline inflation to increase in the second half of the year to around 3%.
“This volatility reflected the legislated unwinding of electricity rebates, which would boost headline inflation over 2025 and 2026,” it stated.
Even with the effects of rebates on the data, the RBA sounded a note of confidence on cuts in its published minutes.
“Members agreed that – based on what they knew at the time of the meeting – preserving full employment while bringing inflation sustainably back to the midpoint of the target range appeared likely to require some further reduction in the cash rate over the coming year,” it read.
The nation’s tight labour market is continuing to drag on forecasts, however.
RBA governor Michele Bullock says the board is expecting labour market conditions to remain tight. Picture: supplied
“A range of indicators supported that judgement,” the minutes state. “This is namely: the ratio of job vacancies to unemployed workers was still somewhat high; firms continued to report some difficulty finding labour; the underemployment rate and hours-based measure of labour underutilisation had been little changed at low levels; and growth in unit labour costs remained high.”
Rate cut chances gone
With just three more RBA board meetings this year, time is running out for borrowers looking to secure more relief before Christmas.
While a rate cut in September was already looking unlikely, Ms Flaherty said Wednesday's data now rules it out.
All four big banks were united in their expectations of at least one further rate cut for 2025 after August's cut, but it will now come down to the next quarterly reading.
“If inflation over the September quarter also comes in above expectations, interest rates are unlikely to reduce before 2026,” Ms Flaherty added.
Changes for the RBA
There will only be two more iterations of headline CPI data in its current format, with the Australia Bureau of Statistics set to transition to a more comprehensive monthly release from November.
The move will see the quarterly data the RBA heavily relies on replaced with a more accurate monthly figure for more immediate forecasting.
The bank will make its next cash rate decision on 29 September. The Australian Stock Exchange shows the chance of a cut was sitting at just 32% as of 25 August.
This article first appeared on Mortgage Choice and has been republished with permission.
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