Month-to-month inflation drops as electrical energy rebates kick in

As Australians proceed to grapple with the rising price of dwelling, the newest Shopper Value Index (CPI) knowledge presents a glimmer of hope. The Australian Bureau of Statistics (ABS) has reported a decline in inflation from 3.8% in June to three.5% in July 2024.

A key driver of this decline? Authorities electrical energy invoice subsidies.

These rebates acted as a short lived circuit-breaker, offering some aid to households scuffling with hovering vitality prices.

Nonetheless, some economists stay cautious. They argue that whereas these subsidies might have addressed the speedy signs of inflation, they could not have tackled the underlying causes.

State and Federal electrical energy subsidies act as circuit breaker

The introduction of latest Commonwealth and State rebates considerably impacted electrical energy costs, resulting in a 6.4% drop in July.

Leigh Merrington, ABS appearing head of costs statistics, stated the primary instalments of the 2024-25 Commonwealth Power Invoice Reduction Fund rebates started in Queensland and Western Australia from July 2024 with different States and Territories to observe from August.

“As well as, State-specific rebates have been launched in Western Australia, Queensland and Tasmania. Altogether these rebates led to a 6.4% fall within the month of July,” Merrington stated.

With out these rebates, electrical energy costs would have truly risen by 0.9% in July.

Economist Chris Richardson (pictured above) stated that whereas the state and federal subsidies decrease prices for households, he doesn’t assume it means a lot for the Reserve Financial institution and rates of interest.

“Economists speak in regards to the position of central banks such because the Reserve Financial institution in conserving inflation low and steady. So certainly an enormous drop in measured inflation is vital?” Richardson stated.

“However in some ways what economists actually imply is that the RBA has a task in conserving the 2 facet of the economic system in steadiness – how a lot we spend versus how a lot we produce.”

Richardson stated inflation begins when there may be “an excessive amount of cash chasing too little stuff” – that means that the economic system is out of steadiness, with demand better than provide.

“However the varied new subsidies add to the amount of cash that may be spent, so that they add to demand whereas not including something to produce.”

Primarily, it signifies that subsidies are a lot better at rearranging price of dwelling pressures than they’re at decreasing them.

How tax-payer cash may also help tame inflation

Nonetheless, Richardson stated there are additionally two arguments value noting that do say an enormous burst of taxpayer cash may also help battle inflation:

• A momentum impact, and
• An expectations impact.

The momentum argument is that subsidies generally is a circuit breaker, in accordance with Richardson – the place reducing inflation can itself additional decrease inflation as a result of a bunch of issues (similar to authorities funds to the states or to the unemployed) are listed.

“That’s true, however it additionally isn’t enormous – it’s a little bit of a ‘pulling your self up by the bootlaces’ argument,” Richardson stated.

The second argument is one round expectations. 

Inflation may begin as a result of there’s an excessive amount of cash chasing too little stuff, however it may preserve going just because employees and companies assume it would.

“A bunch of companies use inflation as a little bit of a benchmark after they announce worth will increase. And it’s comparable with wages – what employees chase is partly linked to the prices they face,” Richardson stated.

“That’s why subsidies may also help the inflation battle when it’s at its hardest – as a result of they may also help to reset expectations.”

On an annual foundation, Housing rose 4.0% within the 12 months to July, down from 5.5% in June. Rents elevated 6.9% for the 12 months to July, down from an increase of seven.1% within the 12 months to June, reflecting continued tightness within the rental market in capital cities.

The annual rise in new dwelling costs has remained round 5.0% since August 2023, with builders passing on increased prices for labour and supplies.  

Annual inflation for Meals and non-alcoholic drinks was 3.8% in July, up from 3.3% in June.

The most important contributor to the annual rise in meals costs was Fruit and greens, which rose 7.5% within the 12 months to July, in comparison with 3.6% to June.

Greater costs for strawberries, grapes, broccoli and cucumber drove Fruit and vegetable costs to their largest annual rise since December 2022.

What this reveals is that whereas Housing might have been offered a circuit breaker within the type of subsidies, different segments are nonetheless rising and subsequently nonetheless placing stress on the price of dwelling of Australians throughout the nation.