Inflation continuing to fall in Australia further exposing the incompetence of our central bank

The Australian Bureau of Statistics (ABS) released the latest – Consumer Price Index, Australia – for the June-quarter 2025 today (July 30, 2025). The quarterly data showed that the inflation rate rose by 0.7 points in the quarter but over the 12 months and on an annual basis fell from 2.4 per cent to 2.1 per cent. However, the monthly measure for June 2025 shows annual inflation at 1.9 per cent – which the RBA should be stating is ‘too low’ given the lower bound of their targetting range is 2 per cent. The inflation rate has been within the RBA’s inflation targeting range for four successive quarters and inflationary expectations are falling or benigh. There are no significant wage pressures evident. Using the RBA’s own logic, its policy interest rate should now be cut.

The summary, seasonally-adjusted Consumer Price Index results for the June-quarter 2025 are as follows:

Component	Quarter %	Annual %
All groups CPI	0.7 (last 0.9)	2.1 (last 2.4)
Trimmed mean series	0.6 (0.5)	2.7 (2.9)
Weighted median series	0.6 (0.7)	2.7 (3.0)

The following Table shows the rates of inflation for the major components of the CPI:

Component	Current quarter %	Last 12 months %	Direction
All groups CPI	0.7	2.1	Falling
Food and non-alcoholic beverages	1.0	3.0	Falling
Alcohol and tobacco	0.7	5.7	Falling
Clothing and footwear	2.6	1.2	Falling
Housing	1.2	2.0	Falling
Furnishings, household equipment and services	1.1	1.0	Rising
Health	1.5	4.1	Falling
Transport	-0.7	-2.6	Falling
Communication	0.1	0.9	Falling
Recreation and culture	0.5	1.7	Rising
Education	0.0	5.5	Falling
Insurance and financial services	0.5	3.1	Falling

The ABS Media Release – CPI rises 0.7% in the June 2025 quarter
Media Release – noted that:

The CPI rose 0.7 per cent in the June quarter, lower than the 0.9 per cent rise in the March 2025 quarter …

Annual inflation to the June 2025 quarter of 2.1 per cent was down from 2.4 per cent to the March quarter. This is the lowest annual inflation rate since the March 2021 quarter …

The main contributors to the quarterly rise were Housing (+1.2 per cent), Food and non-alcoholic beverages (+1.0 per cent), and Health (+1.5 per cent). Partially offsetting the rise was a fall in Transport (-0.7 per cent).

The quarterly growth in Housing was driven by Electricity (+8.1 per cent). The second instalments of both the Commonwealth Energy Bill Relief Fund and State government rebates in Perth were used up by households in the previous quarter. Rebates have the effect of reducing electricity costs for households. This has meant higher out-of-pocket electricity costs this quarter as rebates have been used up …

The main contributor to the slowing of annual inflation was a large fall in Automotive fuel prices (-10.0 per cent) …

Observations:

1. The annual inflation rate continues to decline and is now at the bottom end of the RBA’s targetting range.

2. The monthly measure shows annual inflation at 1.9 per cent – which the RBA should be stating is ‘too low’ given the lower bound of their targetting range is 2 per cent.

3. The main drivers reflect price gouging by privatised electricity providers and seasonal shortages in food.

4. The fiscal support provided by the federal government to offset the price gouging by electricity companies, which has been a very effective anti-inflationary policy, is now being withdrawn and so electricity prices are rising faster than the general price level. The policy put paid to the notion that defeating a supply-side inflationary spiral requires fiscal austerity.

5. The rent inflation is moderating as interest rates have started to fall. The inflation was largely driven by the RBA’s own rate hikes as landlords in a tight housing market have been passing on the higher borrowing costs – so the so-called inflation-fighting rate hikes were a significant force in driving inflation.

6. The main drivers over this whole inflationary period have been related to the pandemic or other global influences that the RBA’s monetary policy had no influence over. The only thing the RBA has done is to punish low-income mortgage holders and deliberately oversee the transfer of their income to wealthy Australians with financial assets (who benefited from the rising interest rates).

This graph shows that the overall inflation rate peaked in the December-quarter 2022 and has been steadily declining ever since.

However, rental inflation lagged the rise in overall inflation in 2021 and really only took off after the RBA started hiking interest rates.

Once the RBA ended its current hiking cycle, the rental inflation has stabilised and is now falling.

Trends in inflation – continuing to fall

Over the last 12 months, the inflation rate was 2.1 per cent (steady).

The peak was in the December-quarter 2022 when the inflation rate was 7.9 per cent.

The following graph shows the quarterly inflation rate since the December-quarter 2005.

The next graph shows the annual headline inflation rate since the first-quarter 2005. The shaded area is the RBA’s so-called targetting range (but read below for an interpretation).

What is driving inflation in Australia?

The following bar chart compares the contributions to the quarterly change in the CPI for the June-quarter 2025 (blue bars) compared to the March-quarter 2025 (green bars).

Note that Utilities is a sub-group of Housing and are significantly impacted by government administrative decisions, which allow the privatised companies to push up prices each year, usually well in excess of CPI movements.

The impact of fiscal policy on that sub-group via the electricity rebates has obviously been significant, which goes to show that governments can moderate inflation through expansionary fiscal policy if the drivers are from the supply-side.

It also demonstrates that monetary policy is ineffective in dealing with this type of inflation.

The next graph shows the contributions in points to the annual inflation rate by the various components.

The ABS noted that:

Electricity rose 8.1 per cent this quarter, following a 16.3 per cent rise in the March quarter.

Despite two consecutive quarterly rises in electricity, the series has recorded a fall of 6.2 per cent over the past 12 months. The annual fall is due to the introduction of the second round of the Commonwealth Energy Bill Relief Fund (EBRF) rebates from July 2024, which continue to reduce electricity costs in most capital cities. …

Excluding the rebates, electricity prices would have risen by 0.4 per cent in the June 2025 quarter. The following graph shows the impact the rebates have had on the Electricity series in the CPI since the September 2023 quarter when the EBRF rebates were first introduced.

The next graph is taken from the ABS and shows the impact of fiscal policy in reducing the inflation rate.

EBRF refers to the government’s Energy Bill Relief Fund.

Inflation and Expected Inflation

The following graph shows four measures of expected inflation produced by the RBA from the December-quarter 2005 to the June-quarter 2025.

The four measures are:

1. Market economists’ inflation expectations – 1-year ahead.

2. Market economists’ inflation expectations – 2-year ahead – so what they think inflation will be in 2 years time.

3. Break-even 10-year inflation rate – The average annual inflation rate implied by the difference between 10-year nominal bond yield and 10-year inflation indexed bond yield. This is a measure of the market sentiment to inflation risk. This is considered the most reliable indicator.

4. Union officials’ inflation expectations – 2-year ahead – this series hasn’t been updated since the September-quarter 2023.

Notwithstanding the systematic errors in the forecasts, the price expectations (as measured by these series) are all well within the RBA’s targetting range of 2-3 per cent.

So the RBA cannot claim that fears of accelerating expectations are preventing them from cutting interest rates further.

Implications for monetary policy

What does this all mean for monetary policy?

The Consumer Price Index (CPI) is designed to reflect a broad basket of goods and services (the ‘regimen’) which are representative of the cost of living. You can learn more about the CPI regimen HERE.

The RBA’s formal inflation targeting rule aims to keep annual inflation rate (measured by the consumer price index) between 2 and 3 per cent over the medium term.

However, the RBA uses a range of measures to ascertain whether they believe there are persistent inflation threats.

Please read my blog post – Australian inflation trending down – lower oil prices and subdued economy (January 29, 2015) – for a detailed discussion about the use of the headline rate of inflation and other analytical inflation measures.

The RBA claims it does not rely on the ‘headline’ inflation rate.

Instead, they use two measures of underlying inflation which attempt to net out the most volatile price movements.

The concept of underlying inflation is an attempt to separate the trend (the persistent component of inflation) from the short-term fluctuations in prices.

The main source of short-term ‘noise’ comes from “fluctuations in commodity markets and agricultural conditions, policy changes, or seasonal or infrequent price resetting”.

The RBA uses several different measures of underlying inflation which are generally categorised as ‘exclusion-based measures’ and ‘trimmed-mean measures’.

So, you can exclude “a particular set of volatile items – namely fruit, vegetables and automotive fuel” to get a better picture of the “persistent inflation pressures in the economy”.

The main weaknesses with this method is that there can be “large temporary movements in components of the CPI that are not excluded” and volatile components can still be trending up (as in energy prices) or down.

The alternative trimmed-mean measures are popular among central bankers.

The authors say:

The trimmed-mean rate of inflation is defined as the average rate of inflation after “trimming” away a certain percentage of the distribution of price changes at both ends of that distribution. These measures are calculated by ordering the seasonally adjusted price changes for all CPI components in any period from lowest to highest, trimming away those that lie at the two outer edges of the distribution of price changes for that period, and then calculating an average inflation rate from the remaining set of price changes.

So you get some measure of central tendency not by exclusion but by giving lower weighting to volatile elements. Two trimmed measures are used by the RBA: (a) “the 15 per cent trimmed mean (which trims away the 15 per cent of items with both the smallest and largest price changes)”; and (b) “the weighted median (which is the price change at the 50th percentile by weight of the distribution of price changes)”.

So what has been happening with these different measures?

The following graph shows the three main inflation series published by the ABS since the December-quarter 2009 – the annual percentage change in the All items CPI (blue line); the annual changes in the weighted median (green line) and the trimmed mean (red line).

The latest data for the three measures is summarised in the first table above.

The following graph shows the evolution of these series since the March 2010.

How to we assess these results?

1. The RBA’s preferred measures are now within their targeting range.

2. There is no wages pressure coming from the labour market.

3. Inflationary expectations are benign or falling.

4. All the indicators support a further cut in the policy interest rate and suggest that the refusal by the RBA to cut rates at its last meeting and further punish low-income debt holders was a folly.

Conclusion

The latest CPI data showed that the annual inflation rate continues to fall and is now likely to fall below the RBA’s inflation targeting range.

All the indicators support a further cut in the policy interest rate.

The evolution of the data over the last several years has defied the statements put out by the RBA in its attempt to justify the 11 interest rate hikes between May 2022 and November 2023.

The hikes were quite simply unjustified and the inflationary episode was transitory and not driven by factors that interest rate hikes could deal with.

That is enough for today!