Inflation drops to 2.8 percent as fuel and power costs decline

Australia’s inflation rate has dropped to 2.8 percent, the lowest since March 2021, aligning with the Reserve Bank of Australia’s (RBA) target range after three years.

The Australian Bureau of Statistics (ABS) data showed that consumer price index (CPI) inflation fell from 3.8 percent in June due to government rebates and reduced automotive fuel prices.

Trimmed mean inflation, excluding volatile prices, remained above target at 3.5 percent, indicating underlying inflationary pressures in essential services.

An elevated trimmed mean inflation rate of 3.5 percent, above the RBA’s target of 2-3 percent, suggests a steady rise in prices for essential goods and services.

Despite the overall easing of inflation, essential areas like healthcare and housing continue to exert cost pressure on households, indicating that inflationary pressures have not completely dissipated.

While the slowdown in inflation may offer some relief to households facing cost-of-living challenges, it is unlikely to trigger an interest rate cut from the RBA before Christmas.

The RBA is expected to convene next week to discuss interest rates and is likely to focus on the impact of underlying price pressures in services and essential goods.

Rebates Drive Energy Prices Down

The 2024-25 Commonwealth Energy Bill Relief Fund rebates, in conjunction with state government rebates in Queensland, Western Australia, and Tasmania, significantly reduced household electricity bills in the September quarter.

ABS data revealed a 17.3 percent decrease in electricity prices in the quarter and a 15.8 percent decrease over the preceding 12 months. These rebates included Queensland’s $1,000 Cost of Living rebate, Western Australia’s $400 energy rebate, and Tasmania’s $250 Renewable Energy Dividend payment.

According to the ABS, without these rebates, electricity prices would have risen by 0.7 percent.

Moreover, automotive fuel prices contributed to the easing of inflation, reducing by 6.2 percent year-over-year as global oil demand decreased. Average unleaded petrol prices dropped to $1.84 per litre, marking a 13-cent decline from September 2023.

Services and Food Inflation Remain High

Despite the overall inflationary decline, prices for services continued to rise, reaching an annual rate of 4.6 percent due to increasing costs in rents, insurance, medical care, and education.

Rental inflation slightly eased to 6.7 percent in the September quarter, partly moderated by recent adjustments to Commonwealth Rent Assistance.

Exclude these adjustments, and rental inflation would have been at 8.5 percent over the year, reflecting a persistently tight rental market with low vacancy rates.

Food prices also remained high at 3.3 percent over the past year, driven by significant increases in fruit and vegetable costs, attributed to adverse weather affecting berry and tomato yields and global challenges like cocoa shortages leading to higher chocolate prices.

Egg prices saw a 9.1 percent increase due to supply constraints from an ongoing bird flu outbreak.

IMF warning to Australia

According to the latest IMF report, Australia is forecasted to experience an inflation rate of 3.6 percent by the end of 2025, with only Slovakia expected to have higher inflation among developed nations. This stark projection comes as inflation eases in many countries, highlighting Australia’s economic challenges.

The report acknowledged that Australia’s approach has been more conservative, opting for less aggressive monetary tightening than countries like the United States to preserve employment levels.