Inflation FALLS within the Reserve Bank target – here’s why it’s way too soon to celebrate

Australia’s inflation rate has fallen within the Reserve Bank’s 2 to 3 per cent target for the first time in three years thanks to $300 energy rebates.

The consumer price index – or headline inflation – dropped to 2.7 per cent in August, a sharp fall from 3.5 per cent in July. 

This was the lowest monthly headline inflation rate since August 2021 when Sydney and Melbourne were still in lockdown.

But the dramatic fall was largely a result of the federal government’s $300 energy rebates that came into effect on July 1, along with generous state government electricity relief programs.

Electricity prices fell by an annual pace of 17.9 per cent, which artificially reduced overall headline inflation in the Australian Bureau of Statistics data.

Queensland is offering $1,000 electricity rebates as Labor battles to win a fourth, consecutive term in October, while Western Australia offers $400 in bill relief.

Petrol prices also fell by 7.6 per cent over the year, with unleaded now selling for less than $1.70 a litre in capital cities but the relief could be short-lived because prices tend to fluctuate wildly.

Reserve Bank of Australia Governor Michele Bullock on Tuesday warned a big fall in headline inflation – which includes volatile price items – would not lead to a rate cut in 2024.

‘That’s going to lower energy prices, fuel prices have also come down in recent months so, it could well be on current forecasts that the headline inflation rate in fact comes in – 12 month ended – below 3 per cent,’ she told reporters in Sydney.

‘That is important because it’s reflecting cost-of-living relief so it is reflected in the prices that people are seeing.

‘But it’s not really reflective of the underlying inflation pulse which is more, what are we observing happening with services really, which is the crux of the matter.’

The official monthly inflation data showed underlying inflation, also known as the trimmed mean, rising by 3.4 per cent over the year. 

This is the Reserve Bank’s preferred measure of inflation and is given more weight when the RBA board decides whether to cut or hold interest rates, now at a 12-year high of 4.35 per cent. 

Even with petrol and holiday accommodation excluded from the CPI, headline inflation still came in at 3 per cent – or at the top of the Reserve Bank band. 

While headline inflation has fallen, underlying inflation without the volatile items is still well above the RBA’s 2 to 3 per cent target. 

The lower inflation rate still had some bad news for consumer with fruit and vegetable prices surging by 9.6 per cent, with the data released only two days after the Australian Competition and Consumer Commission took legal action against supermarket giants Coles and Woolworths. 

Rents still climbed by 6.8 per cent over the year, with tenants still getting squeezed in capital city markets. 

Services inflation is still a major issue with insurance and financial services costs rising by 6.2 per cent as education costs rose by 5.4 per cent. 

But Reserve Bank of Australia Governor Michele Bullock on Tuesday warning a big fall in headline inflation – which includes volatile items – would not lead to a rate cut in 2024