Australia's inflation cools in July, though progress remains sluggish

Australian inflation eased to a four-month low in July as government rebates on electricity bills took effect. However, the moderation in price gains elsewhere fell short of expectations, leading markets to scale back the likelihood of an imminent interest rate cut.

The consumer price index (CPI) increased at an annual rate of 3.5 per cent in July, down from 3.8 per cent in June, according to Australian Bureau of Statistics data released on Wednesday.

The figure slightly exceeded forecasts of 3.4 per cent, prompting markets to slightly increase the odds of the first rate cut by the Reserve Bank of Australia in November to 48.4 per cent, from 58 per cent previously.

The Australian dollar inched up 0.1 per cent to $0.6803, its highest level this year, and the three-year bond yield rose 4 ticks to 3.559 per cent.

On a monthly basis, the CPI was unchanged in July compared to June as electricity prices dropped 6.4 per cent, and petrol declined 2.6 per cent, while rents, food, and gas prices climbed.

"July's inflation print is full of smoke and mirrors. At face value, the fight against inflation looks to have taken a massive step forward...but some of that improvement came from rebates that artificially lowered the cost of electricity," said Harry Murphy Cruise, an economist at Moody's Analytics.

"While that makes the headline inflation figure look a whole lot better, prices are ultimately unchanged."

Indeed, the deceleration in headline inflation was driven by electricity subsidies from the federal and state governments, which started in Queensland and Western Australia last month, with other states and Territories set to follow in August, the statistics agency noted.

It estimated that electricity prices in July would have risen 0.9 per cent, excluding the rebates.