AMP: July rate cut argument strengthens following mild CPI read

The latest monthly CPI data landed earlier today, showing that inflation rose by just 2.1% over the year to May. 

That was down from the 2.4% read in April, and below the market expectations of 2.3%. The Reserve Bank of Australia's (RBA) preferred trimmed mean measure eased to 2.4%, a three-and-a-half-year low.

According to AMP economist My Bui, this sets the perfect backdrop for the RBA to continue its cutting cycle at the July meeting. 

The detail

The slowdown in inflation has been attributed to easing rental price growth, moderating construction costs, and falling petrol prices, which fell 10% in May before the conflict between Israel and Iran. 

AMP economist, My Bui, provided a more detailed breakdown below in her flash note; 

• In May, the biggest rises in annual inflation were rather concentrated in food (egg prices are up a whopping 19.3% over the year while lamb & goat was up 12.7%), tobacco (11.5%), and education (5.7%). The good news is that the RBA is likely going to look through the big rises in grocery prices (as they’re either seasonal or one-off factors), while other big rises in services items have already started to moderate from the peak. For example, insurance inflation of 3.9% (one of the stickiest items) was the lowest rate of growth in three years.

• Housing accounts for 1/5 of the inflation basket and has been one of the major drivers of elevated inflation in Australia over the past few years; but the momentum has been very encouraging lately. New dwelling costs were unchanged over the month and showed the smallest annual growth since April 2021(+0.8%yoy), while rental price growth is still more elevated at 4.5%yoy but still has room to fall further from here, given moderated increases in newly advertised rents.

What does it mean for interest rates?

This downward trend in inflation strengthens the RBA’s position, with the official rate now within its 2–3% target band for the first time in years. 

While markets are pricing in a 90% chance of a rate cut in July, some economists believe the RBA may wait for the more detailed quarterly CPI report at the end of the month before acting. 

My Bui and AMP are not in that camp, however - they see "the economy needing a boost from looser monetary policy, with RBA cuts in July, August, November this year and February next year, taking the cash rate to 2.85%".