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CPI data points towards cash rate hold: Economists

As the quarterly inflation data came in below market expectations, some economists revised their cash rate estimates.

Inflation in Australia showed encouraging signs of moderation, according to the latest quarterly Consumer Price Index (CPI) data released by the Australian Bureau of Statistics (ABS).

The CPI data for the second quarter ended June 2023 revealed a 0.8 per cent increase in inflation for the quarter, contributing to an annual inflation rate of 6.0 per cent.

This marks the second consecutive quarter of lower annual inflation, signalling ‘disinflation’, after coming down from its peak of 7.8 per cent in December 2022 and 7 per cent in the previous March quarter.


One contributing factor to the annual rise in inflation was the increase in demand for new homes purchased by owner-occupiers during the June quarter.

This has contributed to a 7.8 per cent annual increase in inflation for new dwellings. However, that rate has fallen from its peak of 20.7 per cent in September 2022, indicating a cooling down in the housing market.

The ABS data revealed the rate of increase in new dwelling prices has slowed due to reduced demand, improved material supply, and easing material costs.

Other factors contributing to the rise in annual inflation include a 13.9 per cent increase in domestic holiday travel and accommodation, a 6.7 per cent rise in rents, and the previously mentioned growth in new dwelling prices.

CPI data to weigh on central bank’s decision

The quarterly increase has come in below market expectations, with some economists now softening their cash rate estimates ahead of the Reserve Bank of Australia’s (RBA) monetary policy meeting next week, 1 August.

Given the CPI inflation data is now the lowest since September 2021, ANZ’s economist Adelaide Timbrell said the central bank should “find comfort” in holding the cash rate.

The RBA recently highlighted that the cash rate is “clearly restrictive” and that it remained to be seen if more cash rate increases are required.

“The sharp drops in headline and core CPI ... highlight that a 4.1 per cent cash rate may be restrictive enough to bring inflation down,” she said.

AMP economist Shane Oliver agreed: “This ‘should’ all be enough to see the RBA remain on hold next week, but it’s a very close call as the RBA is still likely to be concerned by still high underlying inflation on year on year basis, the still tight jobs market and upside risks to wages growth.”

As such, the bank has revised down its forecast for the cash rate peak to 4.35 per cent (from 4.6 per cent), now in line with the Commonwealth Bank’s economists, who expect a further 25-bp hike next month to a peak of 4.35 per cent.

The ABS data also revealed a decline in goods inflation, dropping from 7.6 per cent in the March quarter to 5.8 per cent in the June quarter.

This decline is seen as positive news for mortgage holders, as goods inflation tends to be more responsive to changes in monetary policy compared to services inflation, CreditorWatch chief economist Anneke Thompson said.

“This shows that consumers have well and truly responded to the RBA’s tightening measures,” Ms Thompson said.

Cash rate increases will have “limited impact” on price growth in the services sector and the RBA board will take the positive drop in goods inflation into consideration.

“This result has reduced the chance of a further cash rate rise at the August meeting,” Ms Thompson said.

While some economists believe that the RBA should hold the cash rate steady given the positive signs of moderation in inflation and the softening economy, Deloitte Access Economics partner Stephen Smith warned the RBA has already gone too far.

“Excessive inflation in Australia has mostly been caused by supply side factors, meaning that interest rate increases have mostly been ineffective at bringing inflation under control,” Mr Smith said.

Rather, inflation has fallen as a result of repairs to global supply chains and an easing of import prices, he explained.

“The Australian economy is softening dramatically, the pace of inflation has peaked and is moderating quickly, wage growth is not excessive and medium-term inflation expectations are not rising. In that context there should be no further interest rate increases in Australia,” Mr Smith said.

Services inflation highest in 20 years

On the services side, the ABS data showed annual price growth for services is the highest since the introduction of the GST over 20 years ago, with price increases for a range of services like rents, restaurant meals, childcare, and insurance keeping inflation high.

This also marks the first time since September 2021 that services inflation has been higher than goods, highlighting the change from 12 months ago when goods like new dwellings and automotive fuel were driving inflation.

Contributing to the price rises are stronger wages growth and increased costs for utilities and rents, while insurance premiums rose across house, house contents, and motor vehicle insurance.

The most significant contributors to the rise for the June quarter were rents (up 2.5 per cent), international holiday travel and accommodation (up 6.2 per cent), other financial services also lifted 2.5 per cent), and new dwellings purchased by owner-occupiers increased by 1.0 per cent.

The report also pointed out that rents experienced the strongest quarterly rise since 1988, driven by a tight rental market with low vacancy rates and international holiday travel and accommodation experienced a significant price increase of 6.2 per cent.

On the other hand, domestic holiday travel and accommodation came down to 7.2 per cent, electricity fell 1.8 per cent, clothing accessories were down 2.2 per cent, and automotive fuel dropped 0.7 per cent.

[Related: Easing consumer spending to weigh on inflation data]

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