Australia's June Inflation Lower Than Expected, But Underlying Pressures Remain High

Headline inflation in June cooled more than anticipated, dropping to an annual rate of 3.8%, down from 4% in May and 4.6% in March. This slowdown has been partly attributed to a three-month consecutive fall in automotive fuel prices.

“

Lower world oil prices as a result of some stabilization in the Middle East in June contributed to fuel prices falling 10.9 percent in the month.

Rachael McCririck, ABS head of price statistics, noted that "lower world oil prices as a result of some stabilization in the Middle East in June contributed to fuel prices falling 10.9 percent in the month." Government fuel excise relief measures also continued to impact prices. The easing of inflation has led some economists to believe the Reserve Bank is unlikely to raise interest rates next month, prompting an immediate sell-off of the Australian dollar.

However, economists caution against premature assumptions of a broad economic slowdown in inflation. They point to underlying inflation, which provides a clearer picture of persistent price pressures, remaining "uncomfortably high" at an annual pace of 3.6% in June, unchanged from May. David Bassanese, BetaShares chief economist, stated, "Although today's results were a little less than feared, they still won't provide a lot of comfort to the Reserve Bank."

“

Although today's results were a little less than feared, they still won't provide a lot of comfort to the Reserve Bank.

Further analysis from the Bureau of Statistics reveals a divergence in inflation trends. While inflation in goods has slowed significantly, from 5.5% annually in March to 3.5% in June, inflation in services has been rising, from 3.6% in March to 4% in June. This pattern is mirrored in tradables versus non-tradables inflation, with services and housing costs, influenced by domestic factors, showing upward pressure. Callam Pickering, Asia-Pacific economist at Indeed, highlighted that for the Reserve Bank's 2-3% inflation target to be met, non-tradables inflation needs to be below 3.5% and services inflation closer to 3%, figures that are currently far from being achieved.

“

To be consistent with the RBA's inflation target of 2-3 percent, non-tradables inflation cannot afford to be much higher than 3.5 percent and services needs to be closer to 3 percent. Neither measure is anywhere close to that right now.