The ice-cream index: How dairy is licking inflation (2024)

Cheaper ice-cream has helped cool inflation with prices across the country falling through October, but it may not be enough to force the Reserve Bank into a pre-election interest rate cut.

Monthly inflation data released by the Australian Bureau of Statistics on Wednesday showed prices broadly rose 2.1 per cent in the year to October – unchanged from September, but below market expectations.

In October alone, inflation eased by 0.3 per cent, including a 2 per cent fall in the cost of holiday travel and accommodation and a 0.6 per cent dip in fruit and vegetable prices.

Over the past year, prices for dairy products, including milk, ice-cream and cheese, dropped 1.8 per cent: a year ago, dairy inflation was at 7.8 per cent. It is the only food and drink category to come in cheaper compared to a year ago and has helped to melt price momentum in groceries more broadly, which grew 3.3 per cent.

A continued collapse in petrol and diesel prices, down 11.5 per cent, also helped to temper price pressures. Lower demand has pushed down global oil prices, with petrol prices across the five capital cities easing to about $1.76 a litre last month.

Electricity prices also plunged, clocking a 35.6 per cent fall in the year to October – the biggest annual fall for the category since monthly records for electricity prices began. The fall was driven by the combined effect of Commonwealth and state energy rebates.

Cheaper power has been a boon for dairy farms, which tend to use a lot of electricity for milk production equipment including milking machines, temporary cool storage and hot water systems.

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While the cost of new dwelling builds and renovations by owner-occupiers fell to 4.2 per cent in October, rents continued to climb, rising 6.7 per cent over the year. Rent rises were tempered by an increase in Commonwealth Rent Assistance, without which rents would have jumped 8.1 per cent.

Rents have now barely moved over the past four months with rental vacancy rates starting to rise after hitting record low levels across every capital city.

But in a concern for the Reserve Bank, the measure of underlying inflation, which excludes large falls or increases in prices, lifted to 3.5 per cent from 3.2 per cent in September.

JP Morgan analyst Tom Kennedy said roughly half of the categories in the inflation gauge had posted outright declines in October, supporting their view that “price pressures have eased significantly, and that underlying inflation will continue to moderate”.

But EY Oceania chief economist Cherelle Murphy said electricity prices and fuel prices continued to lower headline inflation, which has been within the RBA’s target range of 2 to 3 per cent for three consecutive months.

“Unfortunately, that’s where the good news ends, with underlying inflation ticking up and remaining too high, at 3.5 per cent in the 12 months to October,” she said. “Households continue to feel the pressure of rising costs for essentials.”

Murphy said the RBA would need further proof from future inflation numbers to be convinced price pressures were easing.

“Underlying inflation has been above the Reserve Bank’s target for almost three years, reflecting the persistent impact of pandemic policy stimulus and supply constraints, among other factors,” she said.

Financial markets and a growing number of economists do not expect the Reserve Bank, which holds its final meeting of the year in mid-December, to start cutting interest rates until at least May.

A lower-than-expected result from the December quarter inflation measure, due in the last week of January, may force the RBA to move earlier.

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Commonwealth Bank economist Stephen Wu said the monthly numbers suggested underlying inflation for the full quarter would be around 0.6 per cent, which would be lower than expected by the Reserve Bank.

He said a further slowdown in the costs of new dwellings, which grew by 4.2 per cent over the past 12 months after climbing by more than 20 per cent in late 2022, was a sign that the inflationary pressures evident in the property market were easing.

“New dwelling price growth is now showing clear signs of moderating,” he said. “In both September and October, annual price growth eased owing to lower demand, after an entire year where it looked to be stuck around 5 per cent a year.”

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