Australia’s Annual Inflation Rate Drops to 6 Percent in June Quarter

Customers line up to order seafood at Sydney Fish Market in Sydney, Australia, on Dec. 24, 2022. (Jenny Evans/Getty Images)

Australia saw a significant drop in inflation in the June quarter as price pressures for many consumer goods weakened. However, economists have warned it is too early to expect an end to the Reserve Bank’s current interest rate hiking cycle.

New data from the Australian Bureau of Statistics (ABS) showed that the consumer price index (CPI) rose by six percent in the 12 months to June quarter, down from seven percent in the previous three months and from the peak of 7.8 percent in the December 2022 quarter.

The official figure was below market expectations of a 6.2 percent increase.

In terms of quarter growth, the increase in CPI dropped from 1.4 percent in the March quarter to 0.8 percent in the June quarter, the lowest quarterly result since 2021.

“While prices continued to rise for most goods and services, there were some offsetting price falls this quarter, including for domestic holiday travel and accommodation and automotive fuel,” ABS head of prices statistics Michelle Marquardt said.

Goods Inflation Eases

The main driver of the drop in June’s CPI was a sharp fall in goods inflation to 5.8 percent in the June quarter after two years of solid price increases.

Annual food inflation eased from eight percent in the March quarter to 7.5 percent in the three months to June.

However, food price growth still remained high, with the most significant rise recorded in dairy products (up 15.2 percent), followed by bread and cereal products (up 11.6 percent) and not elsewhere classified food products (up 11.3 percent).

Automotive fuel prices dipped 0.7 percent for the quarter, with a 6.5 percent drop in diesel prices. And compared to a year ago, fuel prices fell by 3.6 percent.

In addition, the growth of furniture, appliances and clothes all slowed down during the quarter.

A store worker serves a customer at Paddy's Market in Sydney, Australia, on Oct. 22, 2022. (Lisa Maree Williams/Getty Images)

Nevertheless, the drop in goods inflation was partly offset by the strong growth in services inflation.

Overall, services prices soared by 6.3 percent in the 12 months to June quarter, the highest annual increase since the introduction of the goods and services tax in 2000.

This was driven by stronger wage growth and increased costs for utilities, rents and insurance premiums.

Insurance saw the highest annual growth at 14.7 percent, followed by vet and other pet services at 7.7 percent and financial services at 7.1 percent.

Meanwhile, rental prices, a major contributor to inflation growth, rose by 6.7 percent in the 12 months to June quarter, up from 4.9 percent in the previous three months.

“Rents recorded the strongest quarterly rise since 1988, reflecting low vacancy rates amid a tight rental market. Rental price growth for flats continued to outpace the growth for houses,” Ms. Marquardt said.

She also noted that the dynamics between goods and services inflation in June reflected a shift from a year ago when goods like new dwellings and petrol were the major drivers of inflation.

Economists’ Take on New Inflation Figures

CreditorWatch chief economist Anneke Thompson said the latest inflation data indicated that consumers had responded well to the Reserve Bank’s monetary tightening policies.

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

“It now seems that labour force data will become more crucial to the RBA’s decision-making.

“The board will be hoping to see some softening in the unemployment rate to reduce the chance of further pressure on wages.”

Similarly, Oxford Economics Australia economist Sean Langcake believed the drop in inflation would buy the Reserve Bank some time and allow it to keep a pause on rate rise a little longer.

However, Commonwealth Bank economists expected the Reserve Bank to roll out another rate hike in August due to the uncertainty in services inflation, taking the official cash rate to 4.35 percent.

“A slightly softer June quarter inflation, but still resilient labour market, high services inflation, a recovering housing market, and concerns around productivity growth will all feature in the policy deliberation,” they said.

“Such an outcome would not necessarily preclude the RBA from delivering another 25 basic point rate hike in August. A material undershoot would have ruled out a hike. Today’s data is not a material undershoot.”

Meanwhile, the surprise drop in inflation caused a jump in share prices across sectors as investors had high hope for another rate pause in August.