Australia inflation as it happened: Inflation eases in June, surprising economists and weakening case for rate hike

More on that AMP forecast we mentioned in our last post – their economists Diana Mousina and My Bui have neatly summed up today’s inflation release.

“Keep in mind that inflation is not low, it’s only lower than initially feared,” they said.

“And the fact that we have inflation starting to move in the direction should be expected, given the three rate hikes earlier this year.

“Inflation is still far from the 2.5 per cent target which is a problem, and there is still a risk that it goes up again.”

They’ve also pointed to a repeat culprit in the depths of the inflation data: services inflation.

“In the last 12 months, the largest increases to prices have been in electricity, construction costs, medical and hospital, rents, tobacco (although who buys legal tobacco anymore?!), eating out, education, maintenance and repair of motor vehicles, holiday travel, accessories and financial services,” they wrote.

“The majority of these are services items.

“To get inflation on a more sustainable footing, we need to reduce services inflation.”

This is not new.

If you recall the last time inflation was coming down from a high peak – this time the post-COVID inflation surge – it was far harder to put a lid surging prices for services, as opposed to goods.

This is from the RBA’s minutes from June 2023:

“Core inflation continued to be stubbornly high, driven by persistent services price inflation, which had become a focal point for many central banks.”

So if you’re feeling a bit of déjà vu when it comes to Australia’s current inflation fight, we wouldn’t blame you.

Before today, Westpac had been an outlier among the big four banks by predicting two more rate hikes to come this year.

Following today’s softer-than-expected inflation data, they’ve scratched that forecast and are instead tipping a string of holds to end 2026.

“We no longer expect rate hikes by the RBA this year,” chief economist Luci Ellis said.

“Inflation has been more benign than we feared and the RBA forecast.

“The substantial pass-through of higher energy costs seen in the early phase of the Middle East conflict has not been followed up in recent months.

“This is welcome – we took no pleasure in our prior hawkish view on pass-through, and so monetary policy.

“There is still a risk of a hike in November if inflation picks up again in Q3. But that is not our base case.”

However, she expects RBA Governor Michele Bullock to continue to threaten to hand down another hike.

“Ever since the June meeting’s pause, RBA communication has been signalling that they think they are not finished hiking rates,” Ellis said.

“Inflation is too high and while the economy is slowing, that is – as the governor noted in yesterday’s Q&A – ‘part of the plan’.

“We therefore expect the communication of the RBA to stay hawkish and not rule out further hikes, similar to the language in June.”

Fellow major player AMP has also reversed its call of a rate hike in August, but says there’s still the potential for the cash rate to be raised in November.

The federal Greens have repeated their calls for a national rent freeze, pointing to rental costs rising by 3.6 per cent in the year to June.

“High inflation means that too many households are just one rent increase away from eviction or homelessness,” senator Barbara Pocock said.

“A rent freeze and ban on evictions will give people more security in a cost of living and fuel crisis.  

“Households across the country are already doing it tough.

“They’re struggling to pay their rent and mortgages, as well as the cost of essentials, while they watch their wages go backwards.”

With no support from the government or opposition, this idea will not get through parliament.

Shadow treasurer Tim Wilson has put out a statement, repeating the opposition’s attack line that government spending is to blame for high inflation.

“The Reserve Bank governor has flagged we have a domestic inflation problem, and it won’t be fixed until governments stop borrowing from tomorrow to spend today,” he said.

“No amount of blame-shifting from the Albanese government changes the fact that if the Iran conflict ended, inflation would still be too high,” he added.

Chalmers was asked about government spending in his press conference, where he said there had been “substantial” restraint in the budget.

Speaking at a press conference in Brisbane, Chalmers has confirmed the government’s fuel excise discount will end this Sunday, August 2.

“That fuel excise relief will end midnight on Sunday and that’s because it has played a really important role helping to take some of the sting out of these cost-of-living pressures,” he says.

“It was never the government’s intention for that to be permanent.

“We began to taper that off at the start of the month, deliberately, so that we could provide a bit more cost-of-living help.”

This is no great surprise: the relief was originally scheduled to be scrapped at the end of June, only for the government to announce it would continue it – albeit at half the discount – this month in something of a tapering-off period.

Both Prime Minister Anthony Albanese and Foreign Minister Penny Wong suggested yesterday there would not be another last-minute extension of the popular cost-of-living relief.

As he so often has over the past four years, Chalmers has acknowledged many Australians are still doing it tough after a string of rate hikes and several bouts of hot inflation.

“We understand people are under pressure,” he says, before mentioning a bevvy of the government’s cost-of-living policies, including tax cuts, lower PBS costs, and extended paid parental leave.

“Australia is not immune from global uncertainty, but we’re well-placed and well-prepared to confront it with faster growth than almost every major advanced economy, booming business investment, low unemployment, solid wages growth and stronger public finances,” he adds.

“We’ve made progress in the economy, but there’s more work to do because people are still under pressure.

“That’s why addressing inflation and helping with the cost of living was a big focus of the budget and it’s a big focus of the government alongside building a more productive and resilient economy.”

Treasurer Jim Chalmers has just put out a statement about the inflation figures.

Much like the rest of the reaction to the numbers, his is a mixture of optimism and caution.

First, the good:

“It’s an encouraging outcome that shows we’ve made progress on inflation since the budget, even in the face of intense global uncertainty,” Chalmers says.

“The Treasury, the Reserve Bank and others forecast headline inflation to be in the high fours and even five per cent, but today it has come in at 3.9 per cent, and that’s a better outcome in volatile global circumstances.”

He also touts that inflation has cooled in Australia at the same time it’s risen in much of the rest of the developed world.

But he, like many of the economists we’ve heard from this afternoon, is warning about future uncertainty.

“We already had an inflation challenge in our economy but the war is making it higher than it would otherwise be,” Chalmers says.

“Treasury has warned that the next phase of the conflict could be more challenging for the global economy, with the oil market now more vulnerable.

“While the oil price has fallen around 12 per cent since the end of last week, it remains around 22 per cent higher compared to when the conflict started.

“The initial impact from the conflict on inflation came from fuel but we see it broadening today in other areas such as dwelling construction costs.”

A word of caution for anyone celebrating today’s inflation figures as the end of all rate hikes: there could still yet be a nasty sting in the tail.

While the chance of a rate hike next month has nosedived, according to the market, traders are actually now pricing in a greater chance of another hike by the end of the year at more than 80 per cent, and more than 95 per cent by next February.

“The RBA has finally caught a break,” eToro analyst Josh Gilbert said.

“After three rate hikes this year and an energy shock that refused to relent, a print under expectations is welcome…

“Investors shouldn’t confuse relief with victory, though.

“Core inflation at 3.6 per cent is still a long way from the 2.5 per cent midpoint the RBA is chasing, housing costs are running at 6.8 per cent annually and Governor (Michele) Bullock reminded us only this week that the board’s patience wears thinner the longer inflation sits outside the band.

“Some of the fuel relief is also likely to fade as the excise cut is wound back, so the road from here won’t be a straight line.”

We mentioned before the inflation data was released that the market was pricing in a roughly 20 per cent chance of a rate hike on August 13.

That figure has now dropped to just 3 per cent, and Oxford Economics Australia’s Harry Murphy Cruise said the heat has been taken off the RBA ahead of its next meeting.

“The RBA will be focused less on the headline number and more on the breadth of price rises below the surface,” he said.

“The oil price shock from the Middle East seeps through to the price of everything from food and travel to production and transport. If firms pass those higher costs onto consumers, a temporary oil shock risks becoming a broader and more persistent inflation problem.

“But today’s data dampens those concerns. While annual trimmed mean inflation rose, it increased by less than markets expected.

“Better still, quarterly underlying price growth was unchanged from Q1 and weaker than in Q3 and Q4 last year.

“All that backs up our view that the RBA will keep rates on hold next month. Underlying inflation is not just resisting pressure to rise; in quarterly terms, it is continuing to ease.”