Australia’s inflation rate eased slightly more than expected during the second quarter, while underlying price pressures also weakened.
The latest figures offered some relief to the Reserve Bank of Australia ahead of its August monetary policy meeting and reduced expectations for another interest rate increase this year.
Australia’s Annual Inflation Falls to 4%
Australia’s consumer price index rose 4% in the second quarter compared with the same period a year earlier, according to data released by the Australian Bureau of Statistics.
The result was slightly below economists’ forecast of 4.1%. It also marked a slowdown from the 4.1% annual increase recorded in the previous quarter.
On a quarterly basis, consumer prices rose 0.6%. This was below the expected 0.7% increase and significantly slower than the 1.4% rise reported during the March quarter.
Underlying Inflation Also Moderates
The trimmed mean CPI, which is closely monitored by the Reserve Bank of Australia as a measure of underlying inflation, also came in below expectations.
Trimmed mean inflation rose 3.6% from a year earlier, down from 3.7% in the previous quarter. Economists had expected the figure to remain unchanged at 3.7%.
On a quarterly basis, trimmed mean inflation increased by 0.8%. This matched the previous quarter but remained below forecasts for a 0.9% rise.
The softer reading suggests that broader inflationary pressure across the Australian economy may be gradually easing.
Housing Costs Remain the Main Inflation Driver
The Australian Bureau of Statistics said housing costs remained the largest contributor to annual inflation.
Housing prices rose 6.8%, partly due to higher electricity bills following the expiration of government energy rebates. Rising construction costs for new homes also contributed to the increase.
Food and non-alcoholic beverages added further pressure, while prices for recreation and cultural services also increased.
However, transport inflation slowed considerably. Automotive fuel prices fell as global oil prices declined and fuel excise relief helped reduce costs for consumers.
Westpac Drops Its RBA Rate Hike Forecast
Westpac analysts said inflation had been more moderate than both the bank and the Reserve Bank of Australia had expected.
They noted that the strong increase in energy costs seen during the early stages of the Middle East conflict had not continued in recent months.
Following the inflation report, Westpac said it no longer expects the RBA to raise interest rates during the remainder of the year.
However, the analysts still expect the central bank to maintain a cautious and relatively hawkish tone. The RBA may continue to warn that further rate increases remain possible if inflation fails to decline as expected.
Australian Dollar Falls After CPI Report
The Australian dollar weakened following the release of the inflation data.
The AUD/USD exchange rate fell by approximately 0.4% as traders reduced their expectations for additional RBA interest rate increases.
Lower rate-hike expectations can weigh on a currency because they reduce the potential return available from assets denominated in that currency.
RBA Remains Prepared to Raise Rates
The softer inflation figures were released one day after RBA Governor Michele Bullock repeated that the central bank remained prepared to increase interest rates if inflation proved more persistent than expected.
Bullock said policymakers were still assessing whether the previous series of rate increases had been sufficient to return inflation to the RBA’s target range of between 2% and 3%.
The Reserve Bank’s cash rate currently stands at 4.35%.
August RBA Decision Comes Into Focus
The RBA is scheduled to announce its next monetary policy decision on August 11.
The latest inflation figures reduce the immediate pressure on policymakers to raise rates. Nevertheless, inflation remains above the central bank’s target range, meaning officials are unlikely to declare victory over price growth.
The August statement will therefore be closely watched for updated guidance on inflation, economic growth and the possibility of future rate increases.
