Inflation slows to 3.5%, underlying price pressures remain sticky

The Australian Bureau of Statistics reported on Wednesday annual inflation rose 3.5% over the year in July, slower compared to 3.8% in June. 

The result came in hotter than the market expected, with all four major banks forecasting the headline figure to land between 3.2% and 3.3% ahead of the release. 

Despite headline inflation cooling, underlying price pressures remain sticky with trimmed mean measure unchanged at 3.6%. 

Trimmed mean inflation excludes volatile items, or those whose prices can change significantly such as automotive fuel. 

"Measures like the trimmed mean can give more insights into how underlying inflation is trending without the impact of temporary shocks," ABS head of price statistics Rachael McCririck said. 

Housing costs continue to bite

While easing electricity costs helped slow inflation, rising 6.1% in July versus 22.4% in June, elevated housing costs and food prices remained the biggest contributors to annual price growth. 

"Housing rose by 5.0% in the 12 months to July due to rising costs for new dwellings," Ms McCririck said. 

As expected, new dwelling prices rose 5.7% in the 12 months to July as builders passed on higher costs for materials and labour.

Westpac earlier said residential construction producer prices were running at their highest pace since late-2023. 

NAB forecast cost increases would continue to support elevated new dwelling inflation "for at least the next few months".

Meanwhile, rent inflation was unchanged at 3.6% in the 12 months to July despite the market's recent rent surge. 

Cotality reported the national median rent hit a record $705 a week in the June quarter with the annual growth rate picking up to 5.9%. 

"We have also seen strong growth in advertised rents over the past year, which will support further increases in the CPI measure," CBA senior economist Trent Saunders said. 

Domain said many landlords have increased asking rents in light of the recent changes in housing investment policies. 

See also: SMSF and tax changes risk tightening rental market

Food prices continue to stretch household budgets

Food prices also remained firm, rising 3.2% over the year to July. 

Meals and takeaway food record the strongest price increases, with annual growth reaching 4.5%, hotter than expected. 

ABS said the increase was driven by higher operating, ingredient and other input costs "such as the minimum wage award increases on 1 July". 

See also: Private sector wage growth slows to near four-year low

July CPI supports prolonged RBA pause

Despite the headline inflation easing, the RBA's preferred measure of underlying inflation remained stuck at 3.6%.

Notably, all four major banks had forecast trimmed mean inflation would edge lower to 3.5%.

The latest CPI data reinforces policymakers' view that price pressures are proving more persistent than expected. 

The RBA's August meeting minutes revealed several Board members believed it was "quite possible" inflation risks would eventually require further tightening.  

With underlying inflation still well above its target band and upside risks persistent, the rate-setting committee stressed the battle against inflation is not yet won. 

In her post-meeting press conference earlier this month, RBA Governor Michele Bullock confirmed the Board weighed the possibilities of a hold or a hike and did not discuss the possibility of a cut.

Ultimately, the members unanimously voted to leave the cash rate unchanged at 4.35% earlier this month. 

NAB noted, however, the addition of the phrase "if upside risks materialise" to the minutes suggested the central bank's bias was toward another hike if inflation fails to ease further.