‘Dodged a bullet’: inflation eases to 3.8%, reducing chances of interest rate rise for Australia’s mortgage holders

ABS data shows inflation still too high but tracking lower than anticipated

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Australian mortgage-holders have “dodged a bullet’, with the Reserve Bank now less likely to hike rates next month after new data showed inflation unexpectedly eased to 3.8%, in the year to June, from 4%.

The hotly anticipated consumer price report from the Australian Bureau of Statistics had been seen by some economists as a “make-or-break” moment ahead of the RBA’s interest rate decision on 11 August.

Crucially, the ABS data showed underlying price pressures – while still too high – eased by more than anticipated through the June quarter. The RBA’s preferred measure that trims out the most volatile prices came in at a softer than anticipated 0.8% through the three months.

That lifted the annual pace to 3.6%, from 3.5% – still far higher than the central bank’s official target of 2.5%, but below the RBA’s last forecast for 3.8% by the middle of the year.

Chris Richardson, an independent economist, declared: “Bullet now officially dodged.”

“There’s been growing evidence the RBA’s rate hikes were starting to work in the fight against inflation, and that the Middle East war hadn’t been as bad for inflation (or the economy) as earlier feared,” Richardson said.

That said, the “fight against inflation hasn’t been won yet”.

“But, for now, it looks as if the RBA won’t be raising rates on 11 August.”

Wednesday’s consumer price report triggered a major re-think in financial markets, where the implied probability of a move next month plunged to 4%, from more than 20% at the start of the day, according to Bloomberg data.

The chance of a fourth rate hike this year also dropped to below 50%, from 84%.

For everyday Australians, falling fuel prices helped lower the headline rate of inflation in the month of June – a trend that will reverse in July after the restart of the Iran war and the upcoming expiry of the government’s 16-cent fuel excise discount.

Rachael McCririck, ABS head of prices statistics, said “lower world oil prices as a result of some stabilisation in the Middle East in June contributed to fuel prices falling 10.9% in the month” of June.

But there was plenty of evidence of ongoing price pressures. Home building costs, for example, climbed at the fastest pace in three years, at an annual pace of 5.8%.

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“This was driven by builders passing on higher material and labour costs,” McCririck said.

With rents climbing by 3.6% in the year to June, the treasurer, Jim Chalmers, told journalists in Brisbane that “we know that people are still under pressure”.

“We know that inflation is still higher than we would like it to be,” he said.

“We know that the war in the Middle East and the uncertain developments, even in the last couple of weeks, risks that outlook as well. But in the circumstances that we find ourselves in, these numbers today are encouraging.”

Despite cost-of-living pressures, the ABS said increased overseas travel and higher jet fuel costs helped lift hotel and accommodation prices by 4.6%.

Stephen Smith, a partner at Deloitte Access Economics, said “households and businesses will breathe a collective sigh of relief” after the softer than anticipated inflation report.

“That may be enough to keep the Reserve Bank on the sidelines next month,” Smith said, although “the detail in today’s numbers reveals some red flags”.

“Price pressures in the service economy that are not necessarily linked to the Middle East conflict picked up, suggesting that homegrown inflationary pressures are yet to be tamed.”