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Government rebates help slay the inflation dragon

The August print of 2.7%yr was in line with Westpac’s forecast and the median market expectation. There was further disinflation in services and underlying measures show inflation (outside electricity prices) continued to ease in August.

Growth in the Monthly CPI indicator showed a significant step down, moderating to 2.7%yr in August from 3.5%yr in July. This was the lowest reading since August 2021 and in line with Westpac’s forecast and the median market expectation.

The fall in electricity prices stole the show, down 17.6%yr (in line with our forecast for an 18.3%yr decline) in August - the steepest fall in history. Commonwealth Energy Bill Relief Fund rebates and state government rebates in Queensland, Western Australia and Tasmania combined to deliver this historic fall. Without the rebates, electricity prices would have risen 0.1%yr in August.

These rebates have a shelf life and will expire by the end of 2024-25. By helping to reduce inflation expectations and due to second round indexation impacts, particularly related to administered prices, these rebates are likely to have second round impacts that are minor, but lasting. However, the bulk of the impact will be temporary and as signalled by the RBA Governor at yesterday’s press conference, the RBA will largely look through this fall and assess underlying inflationary pressures in the economy.

Here too there were some positive signs. Services disinflation continues and we can see this in the prices of meals takeout & restaurants (down to 2.7%yr from 6.0%yr a year ago) and other household services (1.7%yr down from 5.1% a year ago). In fact, looking at the underlying measures of inflation we can see a clear moderation. Annual trimmed mean inflation, which excluded the falls in auto fuel and electricity, was 3.4%yr in August, down from 3.8%yr in July. This was the lowest outcome in more than two years. 


And we were expecting a decline in underlying inflationary pressures as the impacts of the benign 2024-25 Fair Work Commission’s minimum and award wage decisions flow through to final prices. A 3.75% across the board increase in award and minimum wages is well down from last year’s increase of 5.75% for awards and 8.6% for minimum wages, combined with top ups in other sectors such as aged care.

We have reviewed the translation of the monthly data across to our September quarter CPI forecasts and are comfortable to leave them as they are at 0.3%qtr for the headline CPI and 0.7%qtr for the Trimmed Mean.


What does it mean for the RBA?

There are positive signs for inflation, but the RBA Governor’s guidance was clear – the RBA Board is looking through the month-to-month volatility to the underlying measures and we will get a fuller picture when we receive the September quarter CPI.

While electricity prices stole the show, additional cost of living measures that are also temporary impact, such as the 20% reduction in car rego fees in Qld and heavily subsidised public transport in WA and Qld, have also flowed through into today’s numbers. For example, urban transport fares fell 5.2%mth in August, the fall was driven by the introduction of the Qld government’s 50 cents public transport initiative. The RBA will be trying to look through these impacts to gauge the underlying pulse.

Growth in housing costs, particularly new dwellings and rents, remain elevated and are a clear risk going forward. We have highlight this in the past – strong population growth and the need for more houses, infrastructure, buildings etc is leading to higher demand for construction services at a time where capacity remains constrained. 


In more detail, the difference to our monthly forecast were minor as outlined below .

Food increased 0.5%mth in line with Westpac’s forecast. The outcome was driven by rises in the prices of fruits and vegetables, most notably strawberries, grapes, broccoli and cucumber.

Alcohol & tobacco was a touch softer, a gain of 0.6%mth vs. 0.7%mth forecast, due to the unexpected slight fall in the price of tobacco.

Clothing & footwear was a touch softer than expected, down 0.4%mth vs. the 0.3%mth expected decline. This was mainly driven by garments suggesting that softer consumer demand is weakening the pricing power of retailers.

Housing was in line with expectations, falling 1.3%mth. As noted, the fall was driven by electricity prices. Rents and new dwellings were broadly in line with expectations, and both remain elevated. New dwelling rose 5.1%yr in August and have remained around 5% since August 2023. Rents increased 6.8%yr in August, down from the 6.9%yr recorded in July.

Household contents & services were in line with Westpac’s forecast at 0.3%mth.

Transport prices were a touch softer than expected at -0.8mth vs. -0.5%mth expected. The monthly decline was mainly driven by a fall in fuel prices (-3.1%mth vs. -2.0%mth forecast).

Communication related goods and services were a touch softer than expected, down 0.4%mth vs. the 0.2%mth expected decline, due to weakness in the prices telecommunications equipment & services.

Recreation came in higher than expected, down 0.2%mth vs. an expected fall of 0.5%. Holiday travel and accommodation fell 1.4%mth vs. an expected fall of 1.6%mth. The main driver of the monthly fall was domestic holiday travel and accommodation as demand was softer as students returned to school.

Financial and insurance services were softer than expected (0.5%mth vs. 0.9%mth forecast). Health and education were broadly unchanged in the month as expected by Westpac. 

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