Underlying inflation for July 2024 has fallen to 3.5%, down from 3.8% in June. The good news this is the lowest inflation number since December 2021. But is it smoke and mirrors?
Markets and home loan brokers have met the announcement with mixed reactions.
Electricity subsidies may have distorted the numbers
Home loan broker, What If We Finance, believe the current inflation figures may be distorted.
The announcement to the market regarding the new underlying inflation figures containing the following commentary.
“The first instalments of the 2024-25 Commonwealth Energy Bill Relief Fund rebates began in Queensland and Western Australia from July 2024, with other states and territories to follow,” said Leigh Merrington, ABS acting head of prices statistics. “Altogether, these rebates led to a 6.4% fall in electricity prices in the month of July. Excluding the rebates, electricity prices would have risen 0.9%.”
In July the Queensland Government credit households $1,000 and the Western Australian Government $400. These rebates had the effect of reducing electricity prices.
In summary the energy rebates have rolled out in some states and pushing inflation lower. As the rebates are one off payment the question remains will inflation bounce back?
The RBA is concerned
The RBA anticipates in the short term the subsidies will reduce underlying inflation down to 3% by the end of 2024 and next year headline inflation will increas3 3.7% when electricity subsidies cease
The latest statistics show at least in the eyes of the RBA inflation remains persistent and strong and this supports the concerns of the RBA.
Inflation and Interest Rates
The RBA targets an inflation range of 2-3%. If inflation is below this range interest rate setting can be more relaxed meaning lower interest rates.
When inflation exceeds the range, the RBA adopts a more restrictive policy stance, and this leads to higher interest rates.
How loan repayments are typically more than 25% of a household’s income. As interest rates rise households pay for on their home loan and this is a significant factor contributing to the cost.
The fixed rate mortgage cliff was an early indicator of the impact of interest rate changes and the impact on cost of living.
Home loan brokers disagree with Reserve Bank
Home Loan Brokers and Mortgage Brokers believe interest rates will fall in 2025. This is at odds with RBA but the cost of living crisis and economic slowdown means something will have to give and more often than not the RBA has reduced interest rates in anticipation of inflation falling within its target range. That is rates may fall before inflations falls below 3%.
What If We Finance can help
During these times of economic uncertainty and rising costs What If We Finance can help today. We are an award-winning mortgage broker who is available 7 days a week 8.30am to 9.30pm to help you navigate the rising interest rate landscape.
Contact us today to find out more and let us show you how you can save on your home loan.
