By Stella Qiu
Australian consumer price inflation slowed to a three-year low in August, driven by government rebates on electricity and a drop in petrol. Core inflation also hit its lowest level since early 2022, indicating that costs are cooling.
Market reaction was subdued as the central bank had already signaled that it would overlook the decline in headline inflation, which is not significant enough to warrant rate cuts in the near future.
The Australian dollar retreated from its 1-1/2-year high and was trading flat at $0.6890, while three-year bond futures remained steady at 96.64.
Swaps suggest a 75% chance that the Reserve Bank of Australia may start cutting rates in December, following its decision to keep policy unchanged and not consider a rate hike on Tuesday.
Data from the Australian Bureau of Statistics revealed that the monthly consumer price index (CPI) rose 2.7% annually in August, down from 3.5% in July and in line with market expectations.
On a monthly basis, the CPI declined by 0.2% in August compared to July. Electricity prices fell nearly 15% and petrol dropped 3.1% during the month. Annual electricity prices saw the largest decrease since the early 1980s, down by 17.9%.
The RBA has maintained interest rates since November, believing that the current cash rate of 4.35% is sufficient to achieve its inflation target of 2-3% while supporting employment growth.
However, underlying inflation, which stood at 3.9% in the previous quarter, has only slightly decreased over the past year. This lack of progress in inflation reaching the target range is a concern for policymakers.
The trimmed mean, a key measure of core inflation, slowed to an annual rate of 3.4% from 3.8%, remaining above the target band of 2-3% and posing a challenge to potential interest rate cuts.
Services inflation stood at 4.2% in August compared to a year ago, showing a slight slowdown from July's 4.4%.
"The RBA continues to monitor inflation trends closely, so monetary policy will likely overlook this temporary abnormality in price data," said Dwyfor Evans, Head of APAC Macro Strategy at State Street Global Markets.
Analysis:
The recent slowdown in Australian consumer price inflation and core inflation indicates that costs are easing, potentially leading to lower interest rates in the future. This could have implications for your investments, as lower rates may impact the performance of certain assets such as bonds and interest-sensitive stocks. It's important to stay informed about central bank policies and economic indicators to make informed decisions about your financial portfolio.