Acceleration in Australia’s inflation for August was seen, erasing all the progress Australia had achieved in the months previously. Australia’s monthly consumer price index (CPI) rose 5.2% in the year to August, up from the 4.9% in the previous month, and was the first rise in the pace of gains in four months. Expectedly, this lift has stirred debate about potential cash rate hikes in the coming months, to continue to promote the cooling down of the economy.
However, a CPI rise does not represent an automatic trigger for the Reserve Bank to raise interest rates again. Instead, policymakers must focus on the drivers of inflationary pressures, and in this case, fuel prices were one of the main culprits. Given that Australia is involved in free trade, global supply restraints on fuel have caused extreme volatility in automative fuel prices. With international oil prices hitting two-month highs, these increased costs have flowed onto Australia’s market. As such, petrol prices rose 13.9% in August, compared to a fall of 7.6% in July.
Cost-of-living pressures continue to put upwards pressure on the general price level as well. Housing was up by 6.6% in the year to August, as well as tenants facing rent rises of around 7.8%. Much of this is driven by the limited supply of housing available in Australia.
Additionally, electricity prices rose 12.7% in the 12 months to August due to increases in wholesale prices. However, much of this will be offset through the Government’s rebate scheme under the Energy Bull Relief Fund. This policy was implemented with the intention to reduce the impact of electricity price increases for any eligible households and hence minimise inflationary pressures.
Despite this, it is crucial to recognise that CPI inflation is impacted by items with volatile price changes like automotive fuel, energy and housing prices. Accordingly, it can be helpful and beneficial to exclude these one-off items from the headline CPI to provide a view of underlying inflation. In this case, exclusion of these volatile items from the monthly CPI indicator highlights that the annual rise of 5.5% in August is lower than the 5.8% rise in July. Ultimately, Australians can remain optimistic about the economy’s recovery, given that the CPI and underlying inflation rate has recovered from the peak of 8.4% in December 2022.
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