Australia’s inflation rate decreased to 3.5% for the year ending in July 2024, marking its lowest level since March. This decline comes as energy bills fell by 5%, largely due to the federal government’s energy subsidies.
Impact of Energy Subsidies
The Australian Bureau of Statistics, also known as ABS, reported that the annual Consumer Price Index (CPI) growth slowed from 3.8% in June to 3.5% in July. The significant drop in electricity prices, driven by government rebates, played a crucial role in this decrease. The introduction of the Commonwealth Energy Bill Relief Fund and additional state-based assistance helped reduce electricity costs, easing financial pressure on households.
Figure 1: Graph showing monthly and annual movement (in percentage) of electricity in Australia
Despite these positive developments, Australia’s inflation rate fell less than economists expected. They had predicted a rate of 3.4% or lower, which had spurred hopes of an interest rate cut by the RBA (Reserve Bank of Australia) in December. However, the slightly higher-than-expected inflation figure dampened those hopes.
Inflationary Pressures in Other Sectors
While energy costs provided relief, inflationary pressures persisted in other sectors. Food prices, particularly for fruits and vegetables, surged by 7.5% in the year to July, compared to a 3.6% rise in June. The price of strawberries, cucumbers, grapes, and broccoli drove this increase, making it the most significant annual rise in fruit and vegetable prices since December 2022.
Alcohol and tobacco also saw price increases, with a 7.2% annual rise from 6.9% in June. Transport costs climbed by 3.4%, contributing further to Australia’s inflation rate. These sectors’ rising prices offset some gains from the drop in energy costs.
Reserve Bank’s Stance on Interest Rates
The RBA remains cautious despite the decrease in Australia’s inflation rate. Governor Michele Bullock warned earlier in August that inflation remains “too high” and is falling too slowly to justify an interest rate cut by year-end. The central bank has indicated it will look beyond the temporary effects of energy subsidies and focus on underlying inflation trends.
Australia’s inflation rate, excluding volatile items like fuel, holiday travel, and fresh produce, moderated to 3.7% in July, down from 4% in June. The trimmed mean, a more reliable indicator of core inflation, also fell to 3.8% from 4.1% in June.
Energy Prices: The Main Driver of Inflation Drop
Energy prices played a pivotal role in the recent drop in Australia’s inflation rate. The federal and state governments introduced substantial rebates to Queensland, Western Australia, and Tasmania households. These rebates, which took effect in July, led to a 5.1% annual reduction in electricity prices. Without these rebates, electricity costs would have risen by 0.9% in July, demonstrating the impact of government intervention on Australia’s inflation rate.
The introduction of the Commonwealth Energy Bill Relief Fund in July 2023 marked the beginning of a series of rebates that continued into 2024. These rebates reduced electricity costs for households across Australia. In July 2024, the rebates were extended and expanded, further easing the burden on consumers. The first instalment of the 2024-25 Commonwealth rebates and state government rebates played a crucial role in driving down Australia’s inflation rate.
Other Sectors Struggle with Price Increases
Despite the positive impact of energy subsidies, other sectors experienced price increases. The housing sector saw a 4% price rise, driven by a tight rental market and ongoing demand for new dwellings. Rents increased by 6.9% in the year to July, down slightly from 7.1% in June. New dwelling prices rose by 5%, reflecting builders’ efforts to pass on higher labour and material costs.
Transport costs also contributed to Australia’s inflation rate, with automotive fuel prices rising by 4% in the year to July, though down from the 6.6% increase recorded in June. While fuel prices fell by 2.6% in July, they remain a primary factor in the overall inflationary trend.
Wrapping Up!
Australia’s inflation rate has taken a step in the right direction, falling to 3.5% in July, thanks to significant government interventions in the energy sector. However, inflationary pressures in the food, housing, and transport sectors remain concerning. The Reserve Bank of Australia continues to monitor these trends closely, signalling that interest rate cuts are unlikely in the near future. As the country navigates these economic challenges, the government’s role in managing inflation will be crucial in determining Australia’s inflation rate trajectory in the coming months.
