Inflation has now dropped to its lowest level in nearly 18 months, which was a result that surprised many forecasters as well as the Reserve Bank, too, it seems.
According to the Consumer Price Index for the June quarter, headline inflation fell to six per cent in June from seven per cent in March, which was weaker than market expectations of 6.2 per cent and lower than the RBA’s official forecasts.
Headline inflation has now fallen nearly two percentage points from 7.8 per cent in the December quarter to six per cent in the June quarter – or in just six months.
The June quarter inflation reading was also 0.8 per cent, which was the lowest level since September 2021. If one was to annualise this quarterly result for the year ahead, that would see inflation at 3.6 per cent annually, which is very close to the Reserve’s target band of two to three per cent.
While it’s clear that the rapid increase in interest rates has significantly slowed consumer spending – as it was intended – there are some interesting analytics in the latest index.
According to the ABS, services annual inflation recorded its largest annual rise since 2001, driven by higher prices in a range of services categories including rents, restaurant meals, holiday travel and insurance.
However, goods annual inflation continued to ease from 7.6 per cent in the March quarter to 5.8 per cent in the June quarter after two years of strong price increases.
Price rises for food, furniture, appliances, and clothes slowed in the June quarter, while automotive fuel prices were 3.6 per cent lower compared to 12 months ago.
Also, according to the ABS, the rate of growth in new dwelling prices continued to slow. Having peaked in the September 2022 quarter at 20.7 per cent, annual inflation has fallen for the past three quarters to 7.8 per cent in the June 2023 quarter.
The ABS said the recent moderation in price growth reflects lower new demand, improvements in the supply of materials and material costs easing.
What does it all mean?
Prior to the release of the June quarter inflation figures, markets were predicting a 50/50 or so chance of another interest rate hike at the board’s August meeting.
Directly after the inflation result, though, that had fallen to just 14 per cent, which was the indicator for rates to be kept on hold in August.
It certainly does appear that the peak of interest rates is near – or even right now – which will be a relief to borrowers.
It must be said, though, that the forecast “mortgage cliff” never eventuated. That’s because the vast majority of borrowers are longer-term property owners who had the benefit of appreciating the record low interest rate environment for what it was… a glorious moment in time that was never going to last.
While some newer property buyers who may have over-extended themselves financially may have experienced some issues, this was never going to be the case for most property owners, hence, why we haven’t seen any significant uptick in distressed sales.
In fact, the total number of listings currently for sale in many markets around the country are so low that it is one of the reasons why property prices have been recording strong price growth over the past few months.
While it does seem like we might start to see some moderation in interest rates over the next six to 12 months, it’s clear that even when rates were increasing at the fastest rate in a generation, it did not bother buyers much at all.
Plus, all the signs and metrics point to continued strong market conditions with buyer demand high and listings remaining thin on the ground.