Australia’s inflation eased to a four-month low in July, aided by government rebates on electricity bills. However, the slower-than-expected progress in curbing price increases in other sectors led markets to reduce expectations for a near-term interest rate cut.

Data from the Australian Bureau of Statistics, released on Wednesday, showed the consumer price index (CPI) increased by 3.5% year-on-year in July, down from 3.8% in June.

The inflation figure came in slightly higher than the forecast 3.4%, prompting markets to slightly increase the odds against a November rate cut by the Reserve Bank of Australia, reducing the probability from 58% to 48.4%.

Following the news, the Australian Dollar gained 0.1% to $0.6803, nearing its highest level this year, while the three-year bond yield rose by 4 basis points to 3.559%.

On a monthly basis, the CPI remained unchanged in July compared to June, due to a 6.4% drop in electricity prices and a 2.6% decline in petrol prices. 

However, these declines were offset by rising costs in rents, food, and gas, Reuters reports.

“July's inflation print is full of smoke and mirrors. At face value, the fight against inflation looks to have taken a massive step forward...but some of that improvement came from rebates that artificially lowered the cost of electricity,” stated Harry Murphy Cruise, an economist at Moody's Analytics.

“While that makes the headline inflation figure look a whole lot better, prices are ultimately unchanged.”

The slowdown in headline inflation was primarily attributed to electricity subsidies provided by the federal and state governments, according to the statistics agency. These subsidies were introduced in Queensland and Western Australia last month, with other states and territories set to implement them starting in August.

Furthermore, since May 2022, the central bank has raised interest rates by 425 basis points, bringing the rate to 4.35% in an effort to curb inflation. Yet the slow pace of decline in underlying inflation, which is not anticipated to return to the target range until the end of 2025, has led policymakers to rule out the possibility of a near-term rate cut.

In addition, July's report, which heavily emphasises goods in the first month of the quarter, revealed that a key measure of core inflation, the trimmed mean, slowed to an annual rate of 3.8%, down from 4.1% in June.