July inflation surge to 2.8% from 1.9% following massive electricity price rises threatens expected rate cuts, warns economist.
What’s happening: Monthly inflation jumped from 1.9% to 2.8% in July, driven by a 13% spike in electricity prices as state subsidies ended, surprising markets that expected 2.3% and threatening expected interest rate cuts.
Why this matters: The inflation surprise has likely ruled out September rate cuts and may threaten November reductions, potentially affecting emerging property market recovery and consumer sentiment improvements just as both showed positive signs.
The electricity bill shock that hit Australian households in July has delivered an equally jarring blow to interest rate expectations, with monthly inflation soaring well above forecasts and potentially forcing families to endure higher mortgage payments for longer than anticipated.
Following the Australian Bureau of Statistics’ monthly Consumer Price Index release, Oliver Hume Chief Economist Matt Bell warned that July’s inflation surprise has “probably ruled out any chance of a follow up September 30 rate cut by the RBA and may put at risk the widely expected Melbourne Cup Day rate cut on 4th November.”
Electricity prices drive shock
The dramatic inflation jump stems largely from what Bell describes as “payback” for June’s unexpectedly weak result. In June, electricity prices actually fell 0.4% when markets expected a 3.5% increase, creating false optimism about inflation trends.
July delivered the reckoning. According to the ABS data, electricity prices surged 13.0% “as the full impact of the ending of state level subsidies and rebates was felt,” Bell explained.
This single factor pushed annual inflation from 1.9% in June to 2.8% in July: a full half percentage point higher than market expectations of 2.3%. The RBA’s preferred annual trimmed mean measure also rose from 2.1% in June to 2.7% in July.
Monthly volatility offers hope
Bell emphasises that monthly inflation numbers have proven volatile historically, providing some comfort for rate cut advocates. “We can take some solace from the fact that the monthly numbers have been volatile in the past and for that reason, the RBA focuses much more heavily on the quarterly results,” he said.
The September quarter results will incorporate two additional monthly readings before release, potentially moderating July’s impact if August and September show more subdued price growth.
Property recovery at risk
The inflation surprise comes at a particularly sensitive moment for Australia’s property sector. Bell highlights that “some key land markets such as Melbourne bouncing back for in June for the first quarter in nearly 3 years, and consumer sentiment about to push into net positive territory.”
According to Bell’s analysis, “this result puts this recovery at risk.” The timing concern reflects how quickly property markets and consumer confidence can shift based on interest rate expectations.
Bell’s assessment emphasises the importance of upcoming data: “Fingers crossed the next two monthly results are more subdued.”
Broader economic implications
The unexpected inflation jump affects more than just rate cut timing. As recently reported by Dynamic Business, in August 2024, small businesses have been particularly affected by the combination of high inflation and elevated interest rates.
The uncertainty also impacts business planning and investment decisions. Many businesses structured expansion plans around anticipated rate cuts in late 2024, and delays could affect everything from equipment finance to hiring decisions.
Despite the setback, some optimism remains. NAB CEO Andrew Irvine recently predicted three interest rate cuts in 2025, though this timeline may require revision if inflation pressures persist.
The path forward depends heavily on whether July’s spike proves temporary or signals renewed inflationary momentum. Key indicators will include whether electricity prices stabilise after the subsidy adjustments and how other price components evolve in coming months.
For Australian families and businesses, the message is clear: rate relief remains uncertain, with the timing dependent on inflation data cooperating in the critical months ahead. As Bell’s analysis demonstrates, even single-month surprises can significantly alter economic expectations and policy timelines.
The September and October monthly inflation readings will prove crucial in determining whether the widely anticipated Melbourne Cup Day rate cut proceeds as hoped, or whether Australians face an extended period of higher borrowing costs while price pressures moderate.
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