The monthly Consumer Price Index (CPI) indicator rose 4.9% in the 12 months to July 2023, according to last week’s release from the Australian Bureau of Statistics (ABS).
July’s annual increase of 4.9% is down from 5.4% in June, as annual price rises continue to ease from the peak of 8.4% in December 2022. The implied month-on-month (MoM) rise in July was only 0.3%, or 3.6% annualised. The RBA’s preferred “trimmed mean” measure also moderated in July 2023 to 5.6% year-on-year (YoY), the slowest since August 2022 (after 6.0% in June).
The 4.9% YoY headline figure was lower than the consensus expectation of a 5.2% increase and reinforced the market’s view that the RBA will almost certainly keep the cash rate on hold at 4.1% at outgoing Governor Philip Lowe’s final meeting this Tuesday.
The Ups and Downs of July Inflation
The most significant contributors to the July annual increase were housing (+7.3%) and food and non-alcoholic beverages (+5.6%). Reducing the July increase were significant price falls for automotive fuel (-7.6%) and fruit and vegetables (-5.4%).
The annual increase for housing (which has the largest component weight in the CPI) of 7.3% was slightly lower than the 7.4% increase in June. Rent prices rose 7.6% in July, up from 7.3% in June, as the rental market remains tight.
Electricity prices rose 15.7% in the 12 months to July and increased 6.0% in the month of July. These increases reflect price reviews across all capital cities. Rebates introduced from July reduced the impact of electricity price increases for eligible households. If we exclude the impact of rebates from the July 2023 figures, electricity prices would have recorded a monthly increase of 19.2%.
Elsewhere, inflation in insurance and financial services hit a 2-decade high of 15.7% in July, due to strong price rises across car and home insurance policies.
In summary, inflation is coming down overall, but pockets of significant inflationary pressure remain.
Lower-than-expected Inflation Sees Market’s “Peak Rates” Conviction Rise
With inflation coming in below expectations, traders trimmed bets of further rate rises. The market now has only a 37% chance of a lift to 4.35% by the year’s end priced in. It was 48% before the data release.
Financial markets now imply a 75% probability of a Reserve Bank cash rate cut by December 2024. That compares to a roughly 50% chance before the data was released.
It is still possible that inflation pushes higher later in the year amid increases in fuel prices (they have risen around 10% in August) and an upswing in some services categories, although this would likely prove temporary.
The early-November RBA meeting, which closely follows the Q3 quarterly CPI release, is shaping up as a key meeting. The monthly CPI survey only covers 65%-70% of the quarterly inflation survey. So, while the improved monthly trend is encouraging, the RBA still considers the quarterly CPI as the best gauge of inflationary pressures. On balance, we expect there will be enough of a deceleration in the Q3 numbers to keep the RBA on hold.
The RBA forecasts that underlying inflation will not be back in the 2-3% target band until H1 2025. We do not think this forecast rules out an RBA rate cut in the second half of 2024. Historically the RBA has been willing to cut interest rates before inflation was back in the target band several times in the past 30 years, including 2001, 2008 and 2011.
| Jun-23 | Dec-23 | Jun-24 | Dec-24 | Jun-25 | Dec-25 | |
| Trimmed mean inflation | 5.9 | 3.9 | 3.3 | 3.1 | 2.9 | 2.8 |
| Consumer price index | 6.0 | 4.1 | 3.6 | 3.3 | 3.1 | 2.8 |
| Wage price index | 3.7 | 4.1 | 4.0 | 3.8 | 3.7 | 3.6 |
Source: Refinitiv, Wilsons.
Prospects for a Soft Landing Are Building
With inflation easing and interest rates likely now at a peak, prospects for a soft landing are growing. The economy is still demonstrating resilience aided by very low unemployment.
The last employment report softened but the underlying trend is still one of labour market resilience. July jobs surprisingly retraced by -15K MoM, which was much weaker than expected (consensus = +15K). However, this came after upside surprises, including that of June, which lifted by 32K. The monthly Labour Force Survey is very volatile MoM, and the “trend” level of employment growth, based on the 3-month average, is still relatively strong at 31K. The unemployment rate for July also increased more than expected to 3.7% (mkt = 3.6%), following a surprising fall in June to 3.5%. Overall, unemployment remains within a range of 3.4% to 3.7% since ~mid-2022, which is the lowest trend in ~50 years, and is still likely below the non-accelerating inflation rate of unemployment (NAIRU), which the RBA estimates at ~4.25% - 4.5%. The RBA’s forecast shows unemployment edging higher over the next year to a peak of 4.5%. So, even with the lift in unemployment, the economy is expected to remain close to “full employment”.
Consumer Spending Softening but not Cratering
The consumer appears to be slowing but is also showing a degree of resilience.
Retail sales values in July 2023 were modestly stronger than expected, bouncing by 0.5% MoM (mkt = +0.3%). However, once again the data remains very volatile, being seemingly distorted by changing seasonal patterns around the end of financial year sales. Indeed, the strength in July came after June materially surprised to the downside, with a sharp retracement of -0.8% MoM. June’s decline offset May, which posted a big upside surprise of 0.8% MoM. Our assessment of the “trend” remains that nominal retail spending since around October 2022 has been close to flat. Indeed, the YoY in July 2023 slowed further to 2.1%, the weakest since August 2021 (when the economy was distorted by COVID lockdowns), following +2.3% in June. Indeed, looking forward over coming months, as retail faces the “strong comps” of fast MoM growth a year ago, the “base effects” will likely see retail in YoY terms weaken further towards a flat nominal spending profile.
The RBA is forecasting the much broader “household consumer spending” measure to slow to 1.3% by year end, with real gross domestic product (GDP) also likely to be very subdued over the coming year.
| Jun-23 | Dec-23 | Jun-24 | Dec-24 | Jun-25 | Dec-25 | |
| Gross domestic product | 1.6 | 0.9 | 1.3 | 1.6 | 2.0 | 2.3 |
| Household consumption | 1.6 | 1.3 | 1.9 | 2.4 | 2.5 | 2.6 |
| Unemployment rate (%) | 3.6 | 3.9 | 4.2 | 4.4 | 4.5 | 4.5 |
| Employment growth | 3.2 | 2.3 | 1.2 | 1.0 | 1.1 | 1.3 |
Source: Refinitiv, Wilsons.
Slow Growth Year ahead but Recession Unlikely
In summary, recent trends in inflation are encouraging and are increasing confidence that the RBA hiking cycle is likely done. At the same time, economic growth is slowing but not collapsing. The growth outlook for the coming 6 - 12 months is likely to be very modest, although Australia should avoid recession, helped by low unemployment and strong migration flows. The market still sees the first cut as at least 12 months away. However, more progress on inflation and/or a weaker than expected economy could bring this timing forward. We think equities (and bonds) can deliver modest gains against this backdrop, although active management will be important against a sluggish growth backdrop.
Written by
David Cassidy, Head of Investment Strategy
David is one of Australia’s leading investment strategists.
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