There is much to like in the latest inflation figures, which dropped to 2.1% in the year to June – and even to 1.9%, if you believe the less reliable monthly version.
We have certainly come a long way in the two-and-a-half years since inflation reached nearly 8%.
The most obvious takeaway is that the Reserve Bank board will surely cut the cash rate on 12 August.
Michele Bullock, the central bank’s governor, had previously made it clear that the holdouts on the monetary policy board were waiting for more comfort that inflation was tracking as expected. They have that now.
Notably, the central bank’s preferred “underlying” inflation rate also eased, from 2.9% to 2.7%. That measure excludes volatile movements in the price of things such as petrol, fruit and vegetables and electricity, and it is in line with where the RBA’s economists thought it would be.
So, really, there’s no convincing argument to not cut rates (besides its impact on a rapidly reheating housing market).
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Economists agree. Stephen Smith, a partner at Deloitte Access Economics, said that interest rates were acting as a brake on the economy, and that this was “hard to justify given ongoing global economic volatility and the continued sluggishness of our own domestic economy”.
After making high inflation public enemy number one during Labor’s first term of government, it was no wonder Jim Chalmers hailed the ABS’s latest consumer price report as “stunning” and “absolutely outstanding”.
The upcoming economic reform roundtable is occupying much of the treasurer’s attention, so of course he would prefer not to be forced into fighting a rear guard action against yesterday’s villain.
But another is looming on the horizon.
The politics and economics of falling inflation has been clear: lower is better. It is worth remembering, however, the other side to low inflation, which is slow growth.
The Australian economy expanded by just 0.2% through the first three months of this year, while annual growth stalled at 1.3%. Households are wary of opening their wallets, which has dragged on consumption in 2025. Growth in government spending, which propped up activity in 2024, is waning.
So does that make an inflation rate of just 2% unalloyed good news, or a bit of a worry?
“Clearly, our economy is not growing as quickly as we would like,” Chalmers acknowledged during a doorstop in parliament house.
“We are attentive to those cyclical issues [such as] weaker growth, getting on top of inflation,” Chalmers said.
“But we’re also increasingly focused on the bigger structural issues – productivity growth in our economy, the intergenerational challenge.”
As much as he would like to focus on the future, the last thing we need as a country is to get mired in the low-growth, low-inflation, low-wage world that preceded the pandemic.
The economic implications of disinflation may be changing, and the political implications with it.
