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Divergent inflation trends emerge in July data

July’s inflation data showcased significant differences between the headline rate and the core reading, leading to contrasting market reactions as both figures experienced declines. While the headline rate’s drop was pronounced, the minor dip in the core measurement garnered less attention.

The market focused on the more substantial decline in the headline rate, which fell from an annual 5.4% in June to 4.9% in July, fostering optimism that the Reserve Bank would maintain interest rates at the upcoming final meeting under Governor Philip Lowe.

The ASX responded with gains, interest rates experienced a slight decline, and the Aussie dollar exhibited its usual unpredictability, temporarily weakening before retracing losses.

Notably, the headline rate decreased despite surging electricity prices and increased house prices and rents. The Australian Bureau of Statistics (ABS) identified Housing (+7.3%) and Food and non-alcoholic beverages (+5.6%) as the most significant contributors to the annual rise in July, while price falls for Automotive fuel (-7.6%) and Fruit and vegetables (-5.4%) countered the increase.

The ABS Head of Prices Statistics, Michelle Marquardt, highlighted that “CPI inflation is often impacted by items with volatile price changes like automotive fuel, fruit and vegetables, and holiday travel. It can be helpful to exclude these items from the headline CPI indicator to provide a view of underlying inflation.” When these volatile items are excluded, the decline in annual inflation is more moderate, standing at 5.8% in July compared to 6.1% in June, indicating persistent price pressures in the broader economy, particularly in home building and energy sectors.

Although the 7.3% annual increase for housing was slightly lower than the 7.4% recorded in June, the rise in new dwelling prices was at its lowest since October 2021, driven by easing building material price increases. Rent prices continued to climb, reaching 7.6% in July, reflective of a tight rental market.

Electricity prices surged by 15.7% per cent in the year leading up to July, with a 6.0% increase in July alone. Rebates introduced in July mitigated the impact of these price hikes for eligible households, with Ms. Marquardt noting that without the rebates, electricity prices would have risen by 19.2% for the month.

Food and non-alcoholic beverages rose by 5.6% in the 12 months ending July, a decrease from the 7.0% annual increase in June, attributed to easing food inflation across most categories and a 5.4% decline in fruit and vegetable prices due to increased supply.

Meanwhile, home building approvals faced yet another weak month in July. Total dwelling approvals saw an 8.1% fall, slightly exceeding June’s 7.9% decline. The 12,688 approvals in July marked the lowest monthly total since 2011, largely driven by a nearly 16% slump in non-private dwelling data (flats, units, townhouses, etc.), following June’s 22% decline.

Daniel Rossi, ABS Head of Construction Statistics, noted that “Approvals for private sector houses remained flat, following a 1.0 per cent fall in June.” Most states experienced declines in total dwelling approvals, while approvals for private sector houses demonstrated mixed results across different states. The value of total building approvals fell 16.9%, reversing June’s 7.2% increase.

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