Inflation is moving in the right direction, but not a ‘green light’ for rate cuts

The Australian Bureau of Statistics has released the July monthly Consumer Price Index (CPI) data.

• The monthly CPI indicator was 3.5% in the 12 months to July 2024, falling from 3.8% in June, the second monthly drop in a row.
• This is the lowest result since March 2024.
• The most significant price rises were Housing (+4.0%), Food and non-alcoholic beverages (+3.8%), Alcohol and tobacco (+7.2%) and Transport (+3.4%).
• Annual trimmed mean inflation, the RBA’s preferred measure, which smooths out the impact of temporary or irregular price changes, which was 3.8% in July, from 4.1% in June.

While inflation is moving in the right direction, Governor Bullock has made it clear it is “premature to be thinking about rate cuts”.

The RBA realises that electricity subsidies drove the fallback, excluding electricity, year on year inflation would have been stable.

Sally Tindall, Canstar’s Data Insights Director said:

“July's monthly CPI indicator, while higher than many economists expected, moved in the right direction after a handful of rocky results earlier in the year,” says Tindall.

Trimmed mean inflation has fallen for the third consecutive month giving the Reserve Bank greater confidence its ‘wait-and-see’ strategy is the right course of action.

However, with trimmed mean inflation still sitting at 3.8 per cent, it's certainly not a green light to start cutting rates.

While many central banks have already begun lowering official rates, or in the case of the US Fed, gearing up to do so, it's important to remember that Australia is running on a similar but different track.

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Our sensitivity to cash rate changes is one key reason for this. The majority of Australian borrowers are on variable rates, and, thanks to sky-high property prices, in many cases, are carrying around supersized debts.

This is one of the key reasons why the Reserve Bank didn’t hike the cash rate as high as other central banks, but also why, when it does finally start cutting, it will have a more immediate impact on households.

Borrowers should spend this time through to the end of the year, making sure they’re on a competitive mortgage rate.

No-one knows for certain exactly when the RBA will start cutting the cash rate. Even among the big banks, there’s a six-month difference as to the timing of the first cash rate cut.

If you have a mortgage, don’t plan for rate cuts to fall in your lap - go out there and get one yourself.”

Potential impact of cash rate cuts if each of the big four banks' cash rate forecast is realised

Based on a $600,000 debt today with 25 years remaining