Inflation drops … but not as much as forecast

MORE interest rate hikes are on the cards after Australia’s headline inflation rate came in higher than expected, despite falling to its lowest level in eight months.

The consumer price index rose one per cent in July, resulting in the annual rate of inflation falling to 3.5 per cent, the Australian Bureau of Statistics reported on Wednesday.

Largely as a result of a deceleration in electricity price growth, headline inflation was down from 3.8 per cent in the year to June and at the lowest level since November.

But consensus expectations were for it to fall to 3.3 per cent.

Worryingly for the Reserve Bank, trimmed mean inflation – a measure of underlying inflation that strips out volatile items – held steady at 3.6 per cent, above expectations for a fall to 3.5 per cent.

Stephen Smith, partner at Deloitte Access Economics, said the inflation figures were a “hot mess”.

“It reflects policy-led changes to electricity prices and the partial restoration of the fuel excise,” Smith said. 

“The sharp increase in electricity prices from last July has now dropped out of the annual calculation, while lower regulated tariffs reduced electricity prices last month.

“These policy interventions are making it more difficult to clearly understand price pressures in the economy.”

The trimmed mean remains above the RBA’s 2-3 per cent target band and will keep the central bank on high alert, he said.

Minutes from the RBA’s August meeting, released on Tuesday, showed the board was concerned about upside risks to inflation.

“Any sign that the upside risks to inflation are crystallising could spur an interest rate increase,” Smith said.

“The policy trade-off is becoming sharper. Unemployment has reached 4.5 per cent, employment fell in July, housing conditions have weakened and annual wage growth has moderated to 3.2 per cent.

“The RBA should not overreact to administered electricity-price changes or short-term petrol volatility. Equally, it cannot ignore persistently strong inflation in domestically determined prices.”

Housing was the largest contributor to inflation, up five per cent, ABS head of price statistics Rachael McCririck said.

“New dwellings prices rose 5.7 per cent in the 12 months to July as builders passed on higher costs for materials and labour,” she said.

Fuel prices rose 7.5 per cent in the month after falling for three months in a row.

“This was driven by higher world oil prices and the partial unwinding of the federal government’s fuel excise relief measures in July,” McCririck said.

Food and non-alcoholic beverages were also strong contributors in the month, rising 3.2 per cent, as well as recreation and culture, which rose 2.6 per cent.

Treasurer Jim Chalmers said the fact inflation has moderated for four months in a row was a “promising result” given global economic uncertainty.

“Inflation has come down considerably, it’s already substantially lower than forecast at budget time, but we know it’s still too high and it will bounce around in the coming months on its way back to the target range,” he said.

“Inflation data is even more volatile than usual given movements in fuel and the impact of energy rebates, and the ongoing impact of the war in the Middle East.”

There was better news for housing supply, with residential construction up 8.1 per cent to $109.3 billion in 2025-26.

The signs were positive for dwelling commencements near term, with a growing backlog of houses under construction and strong apartment tracking supporting activity through 2026-27, Michael Dyer, an economist for Oxford Economics Australia, said.

“The outlook softens beyond this point,” he said. 

“Higher interest rates, alongside negative gearing and capital gains tax changes, have triggered a slump in home prices and transaction volumes that has further to run. 

“Rising build costs will compound this, driving a hit to new dwelling demand that will become more tangible next year.”