Inflation rose slightly in July
Economic commentary by Jakub Seidler, Chief Economist of the CBA
July's annual inflation rose to 2.2% from 2.2%, ending slightly above both market and central bank estimates of stagnation at 2%. On a month-on-month basis, prices rose by 0.7% (expectations +0.5), above the long-term trend for July. The main cause was similar to the previous month - only with the opposite effect - attributed to volatile food and holiday prices. These were behind the more pronounced decline in inflation in June, but their effect reversed in July (Chart 1).
On a month-on-month basis, holiday prices rose most strongly in July, up 25%. Significant increases in holiday prices are common during the summer, before prices fall back more sharply in September. This June, prices rose less, driven by the more significant impact of 'first-minute' holiday purchases. However, in July, this effect is not as pronounced and prices rose well above the long-term average month-on-month (Chart 2). Although clothing and footwear prices fell, the July decline was usually more pronounced. Food prices, on the other hand, rose by 0.3% month-on-month, whereas they usually fall in July. These three factors in particular were thus behind the slightly higher July inflation. However, food prices had the strongest impact in terms of the change in their contribution to annual inflation (see Table 1, first row), where the year-on-year decline eased from -4.8% to -3.8%.
Services prices in particular continued to be inflationary, rising by 1.6% month-on-month, still above the long-run average for July 2010-2020 (Chart 3), but in July itself, the month-on-month trend was also above the long-run average for goods prices, mainly attributable to food prices. Still, services prices continued to rise by a strong 4.9% yoy, the same pace as the previous month, while goods prices rose by 0.6% yoy.
On the other hand, the expected cheapening of energy prices in light of announced changes to the price lists of major suppliers has so far not made much of a dent in inflation in June or July, with energy prices declining only modestly, In annual terms, electricity prices slowed down from 10.6% to 8.9%, while natural gas prices moderated their annual decline from 7.9% to 6.7%. Overall, the negative contribution to the year-on-year decline in inflation was thus relatively muted in this category (Chart 4).
Today's inflation developments have thus confirmed once again that one-month swings in inflation in either direction should be taken with a grain of salt, especially when driven by volatile items. Year-on-year inflation excluding food prices would have been 3.4%, which shows that it is food price developments that are behind the marked fall in inflation this year, with tax cuts also reflected.
August inflation is expected to fall again due to the impact of the benchmark base, but this will start to have the opposite effect from October onwards and annual inflation will accelerate again in the last quarter of this year and will be the highest this year. For the whole of this year, the latest forecast expects average inflation of 2.3%.
Table 1: YoY inflation by items most increasing/decreasing YoY inflation compared to May
