Easing inflation opens door for August interest rate cut

Hi everyone, it is your daily 10 minute business and finance news update for this Wednesday, the 30th of July. Welcome to the SBS on the Money podcast. It's a day where the Australian share market rose by about 0.6%. That's a near record. We'll have the details with Luke Laretive from Seneca Financial Solutions.

Ricardo Gonçalves

And that's because inflation continued to ease further into the RBA's 2 to 3% target band, the headline rate at 2.1% for the June quarter, underlying at 2.7%. Some mixed news depending on where you looked. Food inflation remained high with fruit and vegetable prices up 4.6% in the 12 months to June. The bird flu continues to hit egg prices up 19% over the year, while coffee is more than 9.

Ricardo Gonçalves

9% higher because of lower supply from overseas growing areas. In good news though, services inflation is at its lowest level in 3 years as price growth eases for rents and insurance. New dwelling prices also slowing, while the biggest contributor to softer inflation was a huge 10% fall in petrol prices over the year. So to tell us more on what it means for interest rates, I spoke with Besa Deda, the chief economist at William Buck.

Ricardo Gonçalves

Besa with CPI easing to 2.1%, the treasurer called it stunning progress on inflation. Firstly, is it because he even went as far as saying with inflation in the low twos, unemployment in the low fours, and three years of continuous economic growth, it's something no major advanced economy in the world has achieved.

Besa Deda from Willam Buck

Well, I guess first and foremost is that the headline rate of inflation is in the low 2s, but we tend to focus on the underlying inflation rate, as does the Reserve Bank, because it dampens the impact of temporary price measures like subsidies for example. And if we look at the underlying rate of inflation, it's 2.7%, so it's more or less in the high 2s.

Besa Deda from Willam Buck

Now, the treasurer's combination of inflation in the target band, low unemployment, and ongoing growth, I think they are favourable circumstances. If we take, for example, the United States, which is a major economy, the unemployment rate is actually a tad lower. Its preferred measure of inflation is exactly the same as our preferred measure of inflation.

Besa Deda from Willam Buck

But growth went backwards in the March quarter whereas growth for us went forwards, even though it was quite modest. But I'd also say that it's also what's driving that growth story, and if we look at Australia's growth story, it has been propped up by government spending and.

Besa Deda from Willam Buck

net overseas migration through population growth. And in fact if we look at GDP, which is a measure of economic activity in per capita terms, which is stripping our population, that actually went backwards in the March quarter and it's been shrinking for most of the last two years. And that does highlight that there are still some fragilities in the Australian economy.

Ricardo Gonçalves

If we take a closer look at today's inflation numbers though, can we talk about where we are seeing price pressures easing and to what extent it really is helping consumers, because yes, petrol prices are down around 10% on the year, but food, for example, is remaining quite elevated, right?

Besa Deda from Willam Buck

Well, I think what matters is what does your dollar buy, in terms of goods and services. So we need to think about wages growth adjusted for inflation. And if we do that, we've recently started to see a modest recovery, but it hasn't gone back to where it was prior to the pandemic, and that's why some consumers might still be feeling the pinch. In terms of some key categories, as you mentioned, Ricardo food,

Besa Deda from Willam Buck

Look, food prices, did go up, in particular for fruit and veggies, and also eggs. In fact, eggs grew by 19.1% in the year of the June quarter, which is the sharpest pace in 29 years. But for both of those groups, there are special factors that have driven those prices higher.

Besa Deda from Willam Buck

There was weather related events in New South Wales and Queensland earlier this year that have impacted fruit and veggie prices, and also with eggs, there was the outbreak of the bird flu, last year, which we're still feeling the effects of that through the egg producers. Fuel prices, as you mentioned at the bowser did drop, so that's helping our pockets be a bit lighter.

Besa Deda from Willam Buck

But, and then, in my household, Ricardo, unfortunately, snacks and confectionery and coffee, which I probably have too much of, have seen rapid price increases.

Ricardo Gonçalves

Yeah, not just your household, there's the same as mine.

Ricardo Gonçalves

You mentioned governments earlier, government rebates have helped ease cost of living pressures, rent, electricity, childcare, for example, and the ABS has also recognised this. They constantly talk about childcare and electricity, but obviously these rebates can't last forever. So to what extent are they artificially reducing the inflation rate, or will they have a lasting effect, do you think?

Besa Deda from Willam Buck

Well, their purpose was really to provide cost of living support to consumers during the height of the cost of living crises. So some of these rebates are now rolling off, so we've seen the rebates, rolling off in Queensland and WA and so this is the last quarter for those state subsidies that will, you know, see the impact come through to the inflation rate.

Besa Deda from Willam Buck

Federally, the electricity subsidies, will be halved in the second half of this year, starting on July, and then that fully rolls off at the end of this year. So that does impact that headline rate of inflation that I spoke about earlier and that's why it is important to focus on,

Besa Deda from Willam Buck

Underlying inflation which dampens the impact of these temporary measures. Look, subsidies won't or these cost of living support won't permanently have an impact on inflation.

Besa Deda from Willam Buck

Unless they're permanent or unless, you have structural reform, and some of these are not permanent, and they're not through structural reform and therefore you'll just see those temporary effects mostly feeding through that headline rate.

Ricardo Gonçalves

What about the US tariffs, are we seeing any impact on these tariffs in these results, because didn't the RBA a few months ago initially say that they expect US tariffs to be deflationary in Australia?

Besa Deda from Willam Buck

Look, I don't think we're seeing a lot of signs in the data yet, certainly not in the inflation data that we saw today for the June quarter.

Besa Deda from Willam Buck

And that's probably not to be unexpected given the bulk of the announcements on tariffs, were on liberation day early in April, and then later, the US government did pause that for 90 days to 9 July, and that pause has later been extended to 1 August. There have been some announcements around steel and copper, for example, that impact the Australian economy.

Besa Deda from Willam Buck

But I think perhaps where we are seeing more of an impact, Ricardo is through the currency. So tradables inflation in the June quarter rose by only a very small amount, and that's because the Australian dollar against a basket of the currencies that it does the most against the basket of currencies associated with the countries that we do the most trade with.

Besa Deda from Willam Buck

It has appreciated, in particular, the Aussie dollar has appreciated against the US dollar in the June quarter because of course, the US dollar has really sold off quite sharply as market sentiment has moved against the US dollar because of the tariff announcements of what it means for the US economy and what it means for uncertainty.

Besa Deda from Willam Buck

So I think we're seeing a few signs there in terms of tradables inflation. The Reserve Bank has made an assessment that those tariffs will be disinflationary, for Australia, and we agree with that assessment and that there are downside risks to world economic growth.

Ricardo Gonçalves

OK, and so with this CPI figure, the quarterly figure being really the last piece of the jigsaw puzzle that the RBA is looking at when it comes to to discuss interest rates in mid-August, what do you think now it'll.

Besa Deda from Willam Buck

do? Look, I think the data really seals the fate for an August rate cut. The outcome for underlying inflation was bang in line with the Reserve Bank.

Besa Deda from Willam Buck

Forecasts. Now in July, I thought the RBA could have cut the cash rate. I thought they had enough data to do so, but it was quite clear from the rhetoric from the governor that the RBA wanted to be cautious and wanted to keep to a gradual easy path. They were, I think, waiting for today's quarterly inflation data to confirm.

Besa Deda from Willam Buck

Confirm that their inflation forecasts are on the right track, and they received that today, and so I do expect they will deliver a rate cut when they next meet in August. I then expect two more rate cuts from the Reserve Bank in November and in February. Again, just sticking to that cautious and gradual approach that they seem to favour.

Ricardo Gonçalves

That's Besa Deda there, the chief economist at William Buck.

Ricardo Gonçalves

Now, market day on the SBS on the Money podcast.

Ricardo Gonçalves

OK, a quick look at the Australian share market now which rose 0.6%. The S&P/ASX 200 closing just within a whisker of a record high, with the details, I spoke with Luke Laretive, the CEO of Seneca Financial Solutions. Luke, how did the equities and currency markets react to the inflation data? Why? And what's the market now pricing in terms of a potential rate cut in August and beyond?