Inflation figures drop (literally)
Some welcome news indeed, as the monthly inflation figure fell from 6.8 per cent over the year to April, to just 5.6 per cent over the year to May.
This large drop was right at the very bottom of the market forecast range, with some economists even tipping an increase this month (despite the obvious base effect).
It's now clear, then, that inflation peaked in late 2022 in Australia and is now coming down fast.
Westpac Economics put together a neat chart to show the relationship between monthly and quarterly inflation.
Source: Westpac
More cautious commentators may note that the 'core' inflation figures may not come down as quickly.
But at the very least there was nothing to spook the horses in these figures, and markets expect the central bank to put a pause on interest rates in July.
It's important to note that changes in interest rates tend to operate with a long lag, and because of the high volume of fixed rate mortgages still resetting to variable rates there remains plenty of monetary tightening 'in the post'.
Indeed, any further hikes from here would be pushing the recession risks higher.
The key drivers
Fuel prices were 8 per cent lower than a year earlier, but housing costs have been an obvious pest.
There are now some indications that rental prices are approaching a peak as higher rents are leading to a pushback from tenants and more flat-sharing, though asking rents suggest that actual rents may continue to rise for a while yet.
New dwelling costs were up +21.7 per cent over the year to July 2022, but the inflationary pressures from this component should fade fast from here.
The enormous declines commodity prices such as coal, gas, and now oil also bode well for lower inflation ahead.
The US inflation rate peaked earlier than in locked down Australia, and will likely drop to 3 per cent next month, while Canada has already seen its inflation rate drop to 3.4 per cent.
In Europe producer prices are collapsing and the money supply growth is the slowest on record, meaning that inflation will be surely defeated in due course.
Lower oil prices portend lower input prices, while the cost of shipping container freight has dropped by close to 90 per cent from the highs.
Despite this, energy prices in Australia are one potential source of 'sticky' inflation.
Reducing household energy and power bills was, ironically, a key election pledge from the government, but instead prices have rocketed higher.
The wrap
Overall, this was very welcome news which financial markets enjoyed, with an interest rate pause now expected in July, but with one further hike still priced as a possibility before interest rates finally begin easing in 2024.
