Inflation is still too high, leaving the door open for an August rate rise
Key takeaways
- New stats show monthly inflation is still too high, making a rate rise in August a possibility.
- Inflation rose 3.8% over the last 12 months, a slight decline from last month but still too high.
- What's next: The good news is inflation is not increasing. The RBA meets on 11 August to decide whether to hold or raise rates.
The Australian Bureau of Statistics has released its latest monthly inflation statistics, which show an annual inflation rate of 3.8%.
This is a slight improvement on last month's annual figure of 4%.
Underlying inflation, a more accurate indicator that smooths out temporary volatility in prices, was 3.6%, unchanged from the previous month's figure.
The Reserve Bank of Australia (RBA) wants inflation to be somewhere between 2% and 3%. Today's figures show we're still well off the mark.
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What's driving inflation?
The key areas keeping inflation high are housing (up 6.8%), followed by rising costs of food and beverages (3.3%), and recreation and culture (3.3%).
The rise in housing inflation is driven by costs of new dwellings and electricity.
"Electricity remains one of the biggest contributors to annual inflation, with costs 22.4% higher than 12 months ago," said ABS head of price statistics Rachael McCririck.
Fuel prices fell over the period in which these figures were collected (which ended in June). But we are now seeing oil prices rise again thanks to ongoing tensions in Iran.
And that means high inflation could be with us for a lot longer.
What does this mean for borrowers?
Today's figures are are not good news for Australians with home loans, but it could be worse.
Inflation is still higher than the RBA wants it to be, especially the persistent underlying inflation staying at 3.6% for two months in a rate.
With inflation too high, the RBA could raise the official cash rate again when it meets in August. But it may hold off, given inflation is at least flat if not falling slightly.
The cash rate determines interest rates, and when inflation is high the RBA raises it to drive spending and borrowing down.
Another cash rate increase will take interest rates to levels not seen since 2011. This will make loan repayments much more expensive for the average borrower.
Sources
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