Australian inflation falls to three-year low in August, core still above Reuters target

By Stella Qiu

SYDNEY (Reuters) – Australian consumer price inflation fell to a three-year low in August thanks to government electricity cuts and a drop in petrol, while core inflation hit its lowest level since the start of the year 2022, in a sign of lower costs.

Market reaction was limited as the central bank has already said it will look at falling headline inflation, which is not enough to justify short-term rate cuts.

The Australian dollar slipped from a 1-1/2-year high and was last at $0.6890, while three-year futures were little changed at 96.64.

The swaps imply a 75% chance the Reserve Bank of Australia will start cutting rates in December after holding policy constant and not discussing the option to hike on Tuesday.

Data from the Australian Bureau of Statistics showed on Wednesday that the monthly consumer price index (CPI) rose at an annual pace of 2.7% in August, down from 3.5% in July and falling in line with market forecasts .

On a monthly basis, the CPI fell 0.2% in August from July.

Electricity prices fell by almost 15% in August, while gasoline fell by 3.1%. On an annual basis, electricity prices fell 17.9%, the biggest annual decline since the early 1980s.

This is due to electricity subsidies from federal and state governments, the ABS noted. Otherwise, it would have risen 0.1% in August.

The RBA has kept rates steady since November, believing the cash rate of 4.35% – up from a record low of 0.1% during the pandemic – is tight enough to bring inflation to its target range of 2-3 % while maintaining occupancy gains.

However, core inflation – which was 3.9% last quarter – has fallen very little over the past year, which is why policymakers are not confident that inflation is moving towards the target range.

Indeed, a careful measure of core inflation, the stripped-down average, slowed to 3.4% annually from 3.8%, leaving it above the target range of 2-3% and an obstacle to rate cuts interests.

The monthly report also provided the first many services update for the quarter, which showed services inflation was 4.2 percent in August from a year ago, only slowing slightly from July’s 4.4 percent.

“The trimmed average was also lower, but not to the same extent as the headline, suggesting a dominant fuel component for the overall rate,” said Dwyfor Evans, head of APAC Macro Strategy at State Street (NYSE: ) Global Markets.

“The RBA is keeping an eye on inflation trends for now, so monetary policy will look at this month of anomalous price data.”