Fears of an interest rate hike tempered with latest data

INFLATION levels have fallen below four per cent for the first time since the outbreak of the Iran war.

The latest inflation data from the Australian Bureau of Statistics showed headline inflation falling from four per cent to 3.8 per cent in June. It is the fourth monthly decrease in a row.

Trimmed mean inflation, the preferred measure by the Reserve Bank, remained steady at 3.6 per cent.

ABS head of price statistics Rachel McCrick said the fall in inflation coincided with transport costs moderating for the month.

“Lower world oil prices as a result of some stabilisation in the Middle East in June contributed to fuel prices falling 10.9 per cent in the month,” she said on Wednesday.

“The federal government’s fuel excise relief measures, which contributed to lower automatic fuel prices in April and May, also remained in place.”

The fuel excise measures reduced the cost of fuel by 32 cents a litre during the month.

However, the measure was reduced to just 16 cents in July, before being phased out entirely from Sunday.

Treasurer Jim Chalmers said the inflation figures were reassuring following a period of economic volatility.

“It’s an encouraging outcome that shows we’ve made progress on inflation since the budget, even in the face of intense global uncertainty,” he said.

“Treasury has warned that the next phase of the conflict could be more challenging for the global economy, with the oil market now more vulnerable.”

Housing remained the biggest contributor to inflation for the period, rising by 6.8 per cent.

“Annual inflation for new dwellings has reached its highest level in almost three years, at 5.8 per cent,” McCrick said.

“This was driven by builders passing on higher material and labour costs.”

Annual housing inflation of 6.8 per cent in the 12 months to June reflects rising costs for electricity and new dwellings.

“Electricity remains one of the biggest contributors to annual inflation, with costs 22.4 per cent higher than 12 months ago,” McCririck said.

“This is largely because government rebates which reduced household electricity bills have ended.”

The figures will be closely watched by the central bank ahead of the next board meeting on interest rates in early August.

Underlying inflation has held above the central bank’s target of 2.5 per cent since the Covid-19 pandemic.

The release of the June quarter data comes a day after RBA governor Michele Bullock said higher interest rates were slowing down the economy as expected.

The past four years of above-target inflation had been a cautionary tale for the Reserve Bank board, she said on Tuesday.

“The longer it is out of target, the more concerned that the board becomes,” Bullock told a fundraising lunch at the Anika Foundation in Sydney.

“It is quite at the front of their minds. In the May forecast we had it coming back under three (per cent) towards the end of 2027, and that’s a long time to be above target.”

Bullock said if the oil price shock from the Middle East conflict dragged on and expectations of price pressures became more ingrained, she was concerned the Reserve Bank’s job of bringing inflation under control would become even harder.

The head of economic research at Oxford Economics Australia, Harry Murphy Cruise, said the RBA would be focused less on the headline figures and more on the breadth of price rises.

“Underlying inflation is not just resisting pressure to rise. In quarterly terms, it is continuing to ease,” he said.

“All that backs up our view that the RBA will keep rates on hold next month.”