Cause for a Pause?
  • Goods inflation cooled, which led to an unexpected soft inflation result - this has those in the 'hold' camp bullish on next week's RBA decision to leave the cash rate at 4.10%.
  • Services inflation was still very high, and growing, which supports the 'hike' camp.
  • This release was the indicator the RBA board was looking towards after its pause in July.
  • Other important releases coming out in August include wages growth, and unemployment mid-month.

This was down from 7% in the 12 months to the March quarter. Consumer prices inflated a further 0.8% over the June quarter - the softest growth since September 2021.

The overall result was softer than expected by major bank economists, who all forecast around the 6.2% to 6.3% annualised rate mark.

The drop was largely aided by fuel costs, which are 3.6% cheaper than last year.

Trimmed mean inflation was also 5.9%, hurtling further to the RBA's target of 2-3% by 2025.

This gives further question to a cash rate pause at August's RBA monetary policy meeting.

CBA economists said the RBA decision hangs finely in the balance.

"The CPI today has set up the RBA August Board meeting decision to once again be finely balanced. A slightly softer June quarter inflation, but still resilient labour market, high services inflation, a recovering housing market and concerns around productivity growth will all feature in the policy deliberation," they said.

According to ANZ senior economist Adelaide Timbrell, the lagged effect of interest rate rises may give the RBA cause for a pause next week.

"The RBA will likely find comfort in the latest CPI release, which shows annual inflation to quarter-two of 6.0% year-on-year, below its May SoMP [Statement of Monetary Policy] forecast of 6.3%," Ms Timbrell said.

NAB economists said this softer inflation result will mean an RBA pause.

"[The RBA is] awaiting more information on the evolution of the economy and inflation, amid uncertainties over the lags in previous policy increases," they said.

"We’re favouring the RBA taking the win provided by the first notable core inflation reading below forecast arguably since quarter-two 2021."

The two big releases coming later in August - after the RBA monetary policy meeting - include wages growth on the 15th, as well as unemployment on the 17th. 

Retail trade data for July will come out on the 28th, and the monthly CPI indicator for July will also come out on the 30th.

Currently the near-record low unemployment rate of 3.5% and associated strength of wages growth is aiding to what many economists call "sticky" services inflation.

The price rises of goods are tempering, but services' price growth remains high.

"Rents recorded the strongest quarterly rise since 1988, reflecting low vacancy rates amid a tight rental market. Rental price growth for flats continued to outpace the growth for houses," said Michelle Marquardt, head of price statistics at the ABS.

"Higher demand for international travel, particularly to Europe with the start of the European summer peak season, led to price increases."

However, services inflation is unlikely to be dented by RBA cash rate rises according to CreditorWatch chief economist Anneke Thompson.

"Consumers have well and truly responded to the RBA’s tightening measures," Ms Thompson said.

"The [RBA] board will be hoping to see some softening in unemployment rate, to reduce the chance of further pressure on wages."

The unexpectedly soft inflation result has led the Australian Council of Social Service (ACOSS) to call on the RBA to halt further cash rate hikes.

“Slowing inflation adds weight to our call for the RBA to continue pausing future rate increases, particularly given concerns around increasing unemployment if rates continue to rise,” ACOSS acting CEO Edwina MacDonald said.

“The RBA’s forecast rise in unemployment to 4.5% by July 2025 would equate to 150,000 people losing work. Throwing people out of work is a terrible way to tackle inflation.

Ms MacDonald called on the federal government to do more heavy lifting instead of relying on the RBA's one major tool.

“Increasing rents is one of the biggest drivers of inflation. Governments should intervene directly to bring rental inflation under control through the regulation of rents,” Ms MacDonald said.

“The federal government must also confront the longstanding neglect of people who have the least, and deliver adequate increases to income support payments and investment in care services."

Further building and housing supply woes expected

The Housing Industry Association also said lower building materials prices contributed to the lowering inflation and to halt cash rate hikes for concern of worsening the housing supply problem.

"One in ten Australians are employed in the home building industry and it is not until the rise in the cash rate causes building activity to slow, that the impact of the RBA’s actions will be evident in employment figures," HIA chief economist Tim Reardon said.

“We forecast that in 2024, the number of new homes commencing construction will reach its lowest volume since 2012, when the RBA last increased the cash rate significantly.

"This will also be one of the lowest volumes of new home starts in the past 30 years. This is contrary to the Australian government’s goal of building more than one million homes over the next five years."

Back to the rise camp

The economics team from Barclays says the services inflation will be enough for the RBA to hike at next week's meeting.

"Services inflation was the strongest in more than two decades," they said. 

"[This] will keep the RBA concerned and lead it to hike one more time. We continue to see the August meeting as the most likely time, but note some risk of a delay."

And for AMP Capital chief economist Dr Shane Oliver, he told InfoChoice that outgoing governor Dr Phil Lowe - in his final two monetary policy decisions at the helm - may decide to hike in the intention to take heat off incoming governor Michele Bullock.

"It’s a very close call as the RBA is still likely to be concerned by still high underlying inflation on year on year basis, the still tight jobs market and upside risks to wages growth," Dr Oliver also wrote.