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Economics update | July 28, 2023
28 Jul 2023
Inflationary pressure softens
ABS Consumer Price Index data released earlier this week showed inflation had dropped to 6 per cent year on year in the second quarter of 2023, down from 7 per cent in the previous quarter, defying the market expectations of 6.2 per cent. This is the lowest figure since the third quarter of 2022, mainly driven by a slowdown in annual goods inflation to 5.8 per cent in Q2 as compared to 7.6 per cent in Q1. The annual inflation decelerated for food (down to 7.5 per cent from 8 per cent), clothing (0.3 per cent down from 3.2 per cent), furnishings, household equipment and services (6.3 per cent down from 6.7 per cent).
However, the service inflation accelerated from 6.1 per cent to 6.3 per cent, the largest annual rise since 2021. This surge was driven by rents (6.7 per cent up from 4.9 per cent in March), financial services (7.1 per cent up from 5.9 per cent) and insurance (14.2 per cent up from 8.8 per cent).
The Reserve Bank’s preferred measure of underlying inflation stands at 5.9 per cent over the 12 months to June, which is almost in line with the quarterly inflation, though remaining above the RBA’s target range of 2-3 per cent. The RBA’s interest rate rises are now having the desired impact on price pressures. However, RBA needs to keep a check on rental inflation because if these high COVID-era rent prices get embedded, then gains to household savings from overall disinflation will be minimised which could slow down overall economic recovery.
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