Underlying inflation at 3-year low but RBA unlikely to budge

The Reserve Bank’s preferred measure of underlying inflation has slowed to its lowest level since 2021, according to the Australian Bureau of Statistics.

Both headline and underlying figures fell in August, data released on Wednesday shows.

Power bill rebates helped drive headline inflation — the number showing overall cost of living pressure — down to 2.7 per cent.

But the RBA’s focus is on data that strips out volatility, and the bank’s measure of underlying inflation fell to 3.4 per cent. Falling petrol prices and electricity bills were excluded from the calculation.

That figure has dropped significantly over the past two readings — running at 4.1 per cent in the year to June and then 3.8 per cent for July.

“Both measures of annual underlying inflation in August are the lowest they have been for 2.5 years,” ABS head of price statistics Michelle Marquardt said.

But the bank has warned any fall would need to be sustainable and temporary movements will be ignored. There’s also broader questions about the reliability of monthly data.

Moody’s Analytics economist Harry Murphy Cruise said the momentum was in the right direction.

He said punters should not get ahead of themselves yet the risk borrowers will need to wait beyond February for rate cuts is falling.

“The August inflation print gives plenty of reason for some cautious optimism,” he said.

“The drop in headline inflation to back within target wasn’t a surprise; government rebates and temporary cuts to public transport costs were always going to do the heavy lifting in pulling down the headline measure.

“But it’s the strong progress on underlying inflation, which strips out some of these government-funded price distortions, that will put a spring in the step of those at Martin Place.”

Saxo Asia Pacific senior trader Junvum Kim said easing price rises would give the RBA more flexibility and increase the likelihood of an earlier rate cut.

Betashares chief economist David Bassanese said the chance of a pre-Christmas cut had marginally increased.

“All up, today’s results were encouraging but not yet enough to suggest the RBA can bring forward interest rate cuts to this year,” he said.

“We’ll need to see a consistent trend of subdued inflation in the monthly CPI reports — and confirmed by at least one quarterly CPI report — before the RBA might be persuaded to change its tune.”

But ANZ said inflation in services — items including rent and schools— was higher than expected and doubted the number would change the RBA’s thinking.

The latest figures come just a day after the Reserve Bank held interest rates at 4.35 per cent — as it seeks to get inflation back to target for good.

Governor Michele Bullock on Tuesday told borrowers a cut this year was not likely after a meeting in which the RBA board did not consider raising interest rates.

Yet money markets predict an almost one-in-four chance rates will drop at the central bank’s next meeting, in November.

Westpac’s economists said on Wednesday morning that markets had taken a dovish signal from the RBA’s meeting, meaning they think the bank is more likely to ease.

“That is despite clear guidance that the board still does not rate the prospect of a near-term rate cut, Westpac said.

“Markets are now fully pricing in four rate cuts through to the end of next year, in line with Westpac’s view.”