The monthly reading on inflation has dropped to 3.5% but no newspaper is running with the headline that interest rates could fall this year, which has to disappoint a lot of rate sufferers out there. For those in that boat, there are experts who still say a rate cut could happen this year. More importantly, the chance of a rate rise is heading towards zero.
Only a big, weird development could change that expectation. In case you missed it, let me give you the Consumer Price Index (CPI) information for July in a nutshell:
This latter point has some economists saying this will eventually roll out of the CPI calculations and inflation will rise, so this lower inflation reading won’t impress the Reserve Bank. However, these ‘expert’ economists don’t know about other developments that could offset any rise in energy prices when the rebates roll off.
I liked the fact that the number of items in the CPI basket with annual inflation below 2% continued to rise, and now outnumbers the number of items with prices growing above the RBA’s inflation target band of 2-3%.
I also like the observation of the CBA economics team that the breadth of inflation is narrowing and they “continue to expect the quarterly trimmed mean measure to ease over the second half of 2024.”
They went further to make the big call that they “continue to expect the August monthly CPI indicator to print with a two‑handle.” That means we could see inflation at ‘2. something’!
These guys are sticking to their call that rates will fall this year! The team at Westpac also thinks we’ll see a cut this year, but they didn’t revisit their call yesterday and that could be that monthly CPI readings aren’t seen as reliable as quarterly numbers.
Significantly, we see the September quarter inflation figures at the end of October, just before the RBA’s Cup Day meeting. Some economists have been tipping a cut on that day. This will only happen if inflation looks like it’s getting under 3% and other indicators are telling us that the economy is really slowing down.
This take on the future from AMP economist Diana Mousina looks balanced: “For the Reserve Bank of Australia, the inflation data is consistent with rates being on hold for now. Inflation is still too high (for now) to consider a reduction in interest rates but equally there is no need for rate hikes. While the market is pricing in a rate cut by the end of this year from the RBA (which is mostly driven by expectations for US interest rate cuts), we think the first 0.25% cut will come in February, with the cash rate decline to 4.1% from 4.35%”.
Note that history shows we don’t get one cut but often three in pretty quick succession. I threw that in to help you endure your suffering, knowing that relief is coming, and it might be better than you were expecting!