Inflation was up this quarter, but that doesn't mean its back

The monthly inflation figures for July were released on Wednesday, with annual inflation jumping from 1.9% to 2.8%. So, does this mean that inflation is back? Interest rate cuts are off? Interest rates might have to go back up?

The answer is no, no, and no.

As many people have said the monthly CPI figures are incredibly volatile and should be used with caution. Those saying this include the Australian Bureau of Statistics (ABS) who publish the numbers and the RBA Governor who along with the Monetary Policy Board, set interest rates. The RBA Governor has previously said that they largely ignore the monthly figures, and that the quarterly CPI is what they focus on.

The importance of the quarterly CPI figures is to setting interest rates can be seen in the timing of the interest rate cuts this year. The RBA have cut three times, in February, May, and August. All these cuts have come at the RBA meeting immediately after the release of the quarterly CPI.

One of the main drivers of the increase in inflation was electricity prices. This in turn was driven by a gap in government electricity subsidies. Households in NSW and the ACT did not receive their payments for the extended Commonwealth Energy Bill Relief Fund in July and will instead receive them in August.

This means the big increase in electricity inflation in July will be offset by a big fall in August as the subsidies kick back in. All this highlights the volatile nature of the monthly figures.

Another thing that drove the figures higher was an increase in holiday travel and accommodation. July included school holidays when prices for flights and accommodation go up. But after the school holidays those same prices go back down. Again, this means the big increase in July will be offset by a big fall in August.

Inflation in food has continued to ease but it is still historically high. There have also been large increases in coffee, tea, and cocoa because of poor growing conditions overseas.

In good news, rent increases have slowed again this month. While rents are still going up, they are now increasing at their lowest annual rate since November 2022.

Monthly inflation jumps around a lot. The real focus for the RBA will be the next quarterly CPI release. This will come out in late October. This means that the RBA is unlikely to change rates until its November meeting.