Where now for interest rates? Inflation rate drops to lowest level since 2021 and into RBA target zone

The monthly CPI Index indicator figures today follow the Reserve Bank’s hawkish decision to hold interest rates steady at 4.35% on Tuesday.

While inflation is now back within the central bank’s desired target range, figures are skewed by the impact of the government’s $2.5 billion energy rebate handout.

“The RBA have stated that they will, rightly, look through that temporary effect, so the story on inflation is perhaps not as positive as the release might suggest,” PropTrack senior economist Angus Moore said.

Core inflation – generally preferred by the RBA as a more accurate measure – is still outside target at 3.4%, raising more questions as to where interest rates might end up at the end of the year.

Mr Moore said: “Underlying inflation is probably a better gauge of what the RBA cares about, is still sitting at 3.4%. While that's an improvement from where it was, it remains too high.”

PropTrack senior economist Angus Moore said the ABS data today is an improvement, but more good news is still needed. Picture: realestate.com.au

In her press conference following yesterday’s interest rate announcement, RBA governor Michele Bullock reiterated persistent high inflation is the catalyst denying Aussies some much-desired rate relief.

Ms Bullock said inflation was still too sticky for the bank to consider rate cuts, alongside a warning that the economy is unlikely to return to normal until 2026.

A closer look

Housing was a top contributor (+2.6%) in the 12 months to August, the ABS showed, down from 4% in July.

The ABS data also shows new dwelling prices – including new builds and major renovations – rose 5.1% in the last year and have remained around the 5% since last August.

Treasurer Jim Chalmers has called the figures “welcome and encouraging”.

In a press statement issued today, Mr Chalmers said the government “would not be complacent” despite inflation falling, adding people remain under pressure.

Treasurer Jim Chalmers is feeling positive after today's data showed headline inflation is back within the RBA's target range. Picture: Getty

“Our policies are making a positive difference, but they aren’t the only factor that led to this result with underlying price measures also moderating in today’s figures,” he said.

“We’ve made welcome and encouraging progress on inflation but we want it to moderate further and faster in quarterly terms as well.”

The next quarterly inflation figures will be published at the end of this month and will set a more detailed tone for both the government the RBA to consider.

“The monthly figures can jump around,” Mr Chalmers said. “But the moderation in today’s figures is very heartening.”

Mr Moore added: “The fact inflation is still trending down probably gives the RBA some comfort that the economy is evolving broadly as they're expecting, and that they will be able to start to ease off early next year.

The Reserve Bank of Australia will be looking to see lower underlying inflation numbers before decisions are made on rates. Picture: Getty

“But the release of the more-comprehensive quarterly inflation measure in a bit over a month’s time will be much more important in assessing whether this is the case.”

Canstar data insights director Sally Tindall agreed today’s results “won’t be nearly enough for the RBA to pop the champagne”.

“Nor is it likely to bring forward the timing of rate cuts into 2024,” she said. “At 3.4% in the monthly indicator, annual trimmed mean inflation is still too high.”

The ASX 200 closed lower on Tuesday, dropping 0.13% to 8142 ahead of the latest update today. Since the release of the data, it is sitting at 8137 as of 2:00pm.