Australia's inflation eases to 3-year low in August, core inflation also declines

Consumer price inflation in Australia softened to a three-year low in August due to government subsidies for electricity prices, while core inflation touched its lowest since early 2022 in the welcome progress that could ultimately open the door to rate cuts.

The market reaction was muted, though, as the central bank has already said it's going to look through the headline inflation decline, which is transient and insufficient to warrant near-term cuts.

The Australian dollar still came off its 1-1/2-year high and was last flat at $0.6891, while three-year bond futures were little changed at 96.63.

Add WION as a Preferred Source

Swaps imply a 75 per cent chance the Reserve Bank of Australia will be able to begin cutting rates in December after it held policy steady and didn't discuss the option to hike yesterday.

Australia Bureau of Statistics data on Wednesday showed that its monthly consumer price index rose to an annual pace of 2.7 per cent for August from 3.5 per cent for July, within the forecast of markets.

That is owing to electricity subsidies from the federal and state governments, which lowered prices by almost 15 per cent for August, said the ABS. Otherwise, they would have risen 0.1 per cent.

Petrol prices also eased 3.1 per cent in the month.

More encouragingly, when volatile items and holiday travel were stripped out, the CPI retreated to 3 per cent, within the target band of 2-3 per cent, from July's 3.7 per cent.

Another closely watched measure of core inflation-the trimmed mean-also slowed to an annual 3.4 per cent, from 3.8 per cent in July. The RBA expects it to be at 3.5 per cent by the end of the year.

"What really matters - and as the RBA keeps reminding us - is the sustainable return of underlying inflation to target. That’s still a little way off, but August’s print shows momentum is moving in the right direction," said Harry Murphy Cruise, economist at Moody’s Analytics.

"We’re still of the view that rate cuts won’t come until February, but the risk of it being any later than that is diminishing."

The RBA has maintained rates unchanged since November, deciding that the cash rate of 4.35 per cent, rising from pandemic lows of 0.1 per cent, is enough to nudge inflation into its target band of 2-3 per cent without sacrificing its hard-won gains in jobs.

However, underlying inflation - which was running last quarter at 3.9 per cent - has only fallen a little over the past year, one reason why policymakers were not so confident that inflation is moving toward the target range.

Treasurer Jim Chalmers said on Wednesday that those inflation numbers are "heartening," "encouraging," and "welcome," providing a number of measures, including the underlying inflation, that have come off.

"But we're not getting carried away because we know that monthly numbers can be volatile. We know that inflation doesn't always moderate in a straight line," Chalmers told a press conference in Brisbane.

The monthly report also provided the first update on many services for the quarter, with services inflation standing at 4.2 per cent in August from a year ago, slowing only a little from July's 4.4 per cent.

"Providing the falls in underlying inflation noted today are replicated in the all-important Q3 inflation numbers, it sets up a dovish pivot from the RBA at its meeting on November 5th before a first-rate 25bp rate cut in December," said Tony Sycamore, analyst at IG.