Albeit higher than the 3.4% consensus forecast, the muted rise was widely expected following the initial rollout of massive federal and state government energy subsidies.
ABS' latest monthly CPI indicator shows electricity prices fell 5.1% in the year to July, down from a 7.5% rise in June.
The first instalments of the 2024-25 Commonwealth Energy Bill Relief Fund rebates began, as did those in Queensland and Western Australia in July.
In addition to the $300 across-the-board energy relief payments from the federal government, Queensland topped it up with a further $1,000 electricity bill rebate, while WA injected an additional $400 to bring the total subsidy to $700.
Tasmania likewise doled out the state's one-off $250 renewable energy rebate in July.
Altogether, these subsidies led to a 6.4% fall last month.
"Excluding the rebates, electricity prices would have risen 0.9% in July," said Leigh Merrington, ABS acting head of prices statistics.
The decline in electricity costs resulted in a deceleration in housing prices, which rose 4%, down from 5.5% in June.
Other drivers of the annual rise in the monthly CPI indicator include alcohol and tobacco (up 7.2%), food and non-alcoholic beverages (up 3.8%), and transport (up 3.4%).
Excluding the price changes of volatile items such as fuel, fruits and vegetables, and holiday travel, the underlying inflation lands at 3.7%, down from 4% in June.
July CPI indicator reflects the 'politicisation of inflation'
When these energy relief measures were announced as part of the 2024-25 Budget, the government and some economists estimated around half a percentage point reduction in headline inflation.
But Judo Bank chief economist Warren Hogan considers such a view "absolute and utter rubbish".
Rather than a tool to stamp inflation, Mr Hogan told the Savings Tip Jar podcast that the measures are merely "a government policy to reduce the cost of living".
"It's giving subsidies to households to help them with electricity prices. It doesn't do anything to inflation other than measured inflation," he said.
Following the announcement of the relief measures, the Treasury forecasts that inflation will return to the 2-3% target band by the end of this year.
Mr Hogan considers the government's move to dole out subsidies as the "politicisation of inflation", given the upcoming elections.
Prime Minister Anthony Albanese will be seeking re-election to a second term in office in September.
The Queensland election, on the other hand, is slated in October; Western Australia in March next year.
"It's really irresponsible what the government has done because they thought the economy was on the right track and going to be soft ahead of the elections," Mr Hogan said.
But he cautioned against the possible pick up in the following months, as federal energy rebates across most states will apply from August.
"These next two months are probably the most critical two months in Australia's recent economic history, because ... if inflation stays where it is or, worse, starts to pick up next year, we're in trouble."
While the economist is hopeful "it doesn't play out that way", he also said that the window to take out a bit of insurance and raise the cash rate to what he believes is the ideal level - 5% - "is pretty much closed".
What the RBA will think of the July CPI
Major bank economists and even Mr Hogan believe the RBA will look past the CPI print released Wednesday, as it contains very little information on key services components.
"We do not think today's print will affect the RBA's thinking, especially given it was the first month of the quarter, when a much lower share of services and non-tradables have price changes measures compared with goods and tradables," ANZ senior economist Catherine Birch said.
About half the basket is measured every month, with the remainder generally measured quarterly.
In addition to the items measured monthly, only a further 8% of the basket is updated in July.
"There will be more pricing signal from the August CPI indicator, due on September 25." CBA economist Stephen Wu said.
In addition to market services inflation, Mr Wu said the August CPI "will also show the full impact of energy bill relief, with a circa 20% fall in electricity prices expected to bring headline inflation back down to within the RBA's inflation target band."
This is the last monthly CPI indicator before the next RBA Board meeting on 23-24 September.
RBA Governor Michele Bullock in her latest statement already ruled out any cash rate cuts this year.
However, based on recent movements in the home loan and term deposit markets, industry players appear to be pricing in an interest rate cut before the year is out.
According to Mr Hogan, big banks and other mortgage lenders are taking advantage of the lower bond yields by cutting their fixed home loan rates in a bid to sign on new customers.
In addition to fixed rates, CommBank also lowered its variable rates on Friday.
Australia's largest bank is the last among the Big Four to maintain its forecast of an interest rate cut in November.
"There's a bit of confidence that there won't be a rate hike. But really, that's the market competition view [of CommBank] that says 'we want to get the market share in mortgages from ANZ, Westpac, NAB, or whoever else'," Mr Hogan said.
Photo by Anthony Indraus on Pexels
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