Inflation is down: so why aren’t we celebrating?

So why is the recent fall in inflation, which fell to its lowest level in almost three years, not a reason for widespread celebration and speculation of an imminent drop in interest rates?

Is this a case of being dammed if you do, and dammed if you don’t? Or is it that the Reserve Bank is just never going to satisfied with inflation, whereever it lands. That they are just focused on driving the country into recession.

Well as with most things, the devil is in the detail.

The most recent figures, showing inflation for August fell to an annualised inflation rate of 2.7 per cent, were mostly dragged down by the Federal Government’s decision to reduce everyone’s electricity bill by $150.

This prompted the annual rate of inflation for electricity to fall from 7.5 per cent for the year to June to negative 17.9 per cent during August and that sharp fall, combined with a drop in petrol prices, flowed through to suggest overall inflation was down.

However, other sectors were up like prices for fruit and vegetables, which reported a 9.6 percent hike in prices, the highest increase since 2022, when iceberg lettuces suddenly started selling for $12 each.

So, while it was positive to see the annualised rate of inflation fall, the Reserve Bank is determined to get inflation back to within its preferred target band of between 2 to 3 per cent.  

A one-off figure of 2.7 per cent just isn’t going to cut it. The Reserve Bank is looking for a prolonged period of inflation trading below3 per cent and by that, I mean a period of 6 months or more.

It will also want to see things calm down overseas. The hostilities in the middle each just seem to be getting worse and worse and beyond that, are the hostilities in the Ukraine that doesn’t seem to be getting better any time soon either.

Trade tension with China are also not helping the mix with fears that it will take some time for the Chinese Government to jump start their economy and get growth rates back up to the 5 per cent. This is the rate most economist believe is needed to boost demand for Australian goods.

So, while this is the outlook outside of Australia, it is unlikely that inflation will genuinely come down and then stay below the 3 per cent mark. That is the problem and why a one-off ‘good’ figure was seen as just that. A one off.

As a result, I don’t think any economist is really contemplating a fall in inflation rate until mid-2025 and that is only going to happen if inflation continues to fall and can sustain a prolonged period under 3 per cent.