Inflation Slows But Underlying Inflation Remains a Concern

The Australian Bureau of Statistics reported that inflation slowed to 3.5% in July, down from 3.8% in June. However, this decline may not be as reassuring as it seems, with underlying inflation remaining unchanged at 3.6%. CommBank Senior Economist Trent Saunders noted that the figures provided 'less reassurance that underlying inflation is continuing to ease.'

The housing component of CPI was the largest contributor to annual inflation, increasing by 5% over the year. Food and non-alcoholic beverages rose 3.2%, while recreation and culture prices increased 2.6%. CommBank said the inflation surprise was broader than fuel alone, with restaurant meals rising 1.2% in July and clothing and footwear also showing strength.

The Reserve Bank of Australia may consider further monetary policy tightening if underlying inflation continues to be strong. CommBank's base case is that interest rates will remain unchanged, but Saunders said the figures raised the risk of another rate rise later this year.