Q2 Inflation Below RBA’s Forecasts, August Meeting Close Call

Q2 headline and underlying inflation came in lower than RBA forecasts, thus it is on track to meet target by mid-2025. But inflation remains well above target. Q2 CPI came in below expectations of a 1% q/q rise increasing 0.8% q/q to be up 6% y/y down from 7% y/y in Q1 and the Q4 7.8% peak. Trimmed mean was also lower at 0.9% and 5.9% after an upwardly revised 1.3% q/q and 6.6% y/y. These are the lowest quarterly rates since Q3 2021 and close to the historical average. June inflation moderated to 5.4% from 5.5% in May.

Australia CPI y/y%

Source: MNI - Market News/Refinitiv

• Services inflation rose less than goods on the quarter up 0.8% q/q (higher than average) compared with goods at 0.9% but the annual rate rose 6.3% up from 6.1% and higher than goods (5.8% y/y) for the first time since Q3 2021. This is likely to be the peak in services inflation, as the quarterly rates are moderating and base effects should help the annual rate ease in Q3. But higher wage rates from July 1 are likely to put upward pressure on prices in Q3 as signalled by the July services PMI.

Source: MNI - Market News/Refinitiv

• Domestically-driven non-tradeables eased to 6.9% y/y from 7.5% and tradeables to 4.4% from 6.1%.
• Most components of the CPI still rose but some declined. Lower fuel prices helped to bring the transport CPI down. The largest contributors to Q2 inflation were rents (+2.5% q/q & 6.7% y/y), overseas holiday travel, other financial services and new dwellings purchased. Food prices rose strongly up 1.6% q/q. On the downside electricity prices fell 1.8% q/q and domestic travel -7.2%.
• There will be a partial update of CPI weights in Q3, which the ABS says will increase the weight of international holiday travel. These weights will be published with the July CPI on August 30. This could result in upward revisions to CPI. The full update will now be in Q1 2024 rather than Q4 2023.