Monthly inflation falls to 3.5pc on electricity subsidies

2 months ago 2

Bill relief for electricity

Here's what markets were expected for today's monthly inflation update from the Australian Bureau of Statistics, which is to say 3.4 per cent headline inflation over the year to July:

I had a crack earlier in the day at explaining what might happen - namely lower fuel prices, and lower electricity prices as bill relief and subsidies came into play from 1 July.

There was, however, a significant question mark around the timing of the impact from electricity price bill relief:

A significant bulk of the impact from lower electricity prices seemed likely to hit next month rather than this, pointing to headline inflation of about 3½ per cent over the year to July as explained below:

As it turned out, that wasn't a bad call at all, as thus clarified by the ABS:

Source: ABS

And with fuel prices declining broadly as expected, inflation was indeed 3½ per cent over the year.

Inflation eases gradually

On this monthly index, housing is still accounting for a large chunk of the annual headline inflation, though in real time there does seem to be far less pressure on construction/building materials costs and rents in the economy (and airfares, for that matter), which should translate to lower reported inflation over time.

Services price inflation still looks somewhat sticky for the time being, despite depleted household savings, steadily rising unemployment, and nominal wages growth having now apparently peaked.

With further impact from subsidies due to hit these figures in August, annual headline inflation seems likely to fall to between 2½ per cent to 3 per cent over the coming months on this monthly prices gauge.

The ABS also looks at core figures and inflation with volatile items removed, which both eased from a month earlier, underscoring the disinflationary trend.

Excluding volatile items, annual inflation slowed from 4 per cent to 3.7 per cent, and annual trimmed mean inflation fell from 4.1 per cent to 3.8 per cent.

Source: ABS

Inflation in Australia peaked 6 months later than in many other countries due to border closures and extended lockdowns, among other factors, but we are heading in the right direction still.

The wrap

At face value, then, headline inflation was perhaps a little disappointing, though there will be further declines in the annual result over the coming months.

As such, while the Aussie dollar initially rose from 67.8 US cents to 68.1 cents, the move was faded a as the day went on and all of the increase was later retraced.

In other news, the June quarter construction figures were disappointingly flat, with both residential and non-residential building activity going backwards again.

It looks like GDP growth in the June quarter is shaping up to be another soft result, with a fading contribution from public infrastructure & works.

The data king James Foster, as always, ran through the inflation figures in more detail here.

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