(Bloomberg) -- Australia’s monthly inflation gauge eased more than expected, reflecting global trends and bolstering the case for the Reserve Bank to extend a pause in tightening at next week’s policy meeting.

The consumer price indicator rose 4.9% in July from a year earlier, compared with economists’ estimate of 5.2%, Australian Bureau of Statistics data showed Wednesday. The result was the third consecutive slowdown in the pace with the RBA predicting inflation will fall back inside its 2-3% target by late-2025.

The cooling of prices will be welcomed by Governor Philip Lowe, who has put the central bank in data-dependent mode after raising interest rates 12 times since May 2022. Expectations that the result will allow the RBA to stand pat on Tuesday saw the Australian dollar extend losses and the yield on policy-sensitive three-year bonds fall, while stocks rose.

“With inflation easing globally, including in Australia, there isn’t a strong argument in favor of hiking rates in September,” said Callam Pickering, economist at global job site Indeed Inc. “Softer-than-anticipated wage growth and employment — along with these monthly inflation figures — will support the decision to leave rates unchanged.”

The slowdown in consumer price gains vindicates the RBA’s cautious tightening pace compared with global counterparts. It has hiked rates by 4 percentage points in the current cycle compared with 5.25 by New Zealand and the US. 

The inflation result was aided by Australian government handouts to help offset rising energy costs. “If we exclude the impact of rebates from the July 2023 figures, electricity prices would have recorded a monthly increase of 19.2%,” said Michelle Marquardt, ABS head of prices statistics.

They climbed at a still-brisk 15.7% in the 12 months through July. 

“Today’s data is unlikely to shift the RBA’s wait and see mode,” said Rodrigo Catril, a strategist at National Australia Bank Ltd. in Sydney, adding that “bigger price pressures” are likely in the August and September readings.

Australian three-year bond yields fell 7 basis points to 3.76%, as swaps traders priced in a 60% chance the RBA stands pat for the rest of this year. The currency dropped to 64.68 US cents.

Wednesday’s report comes after US consumer prices rose modestly, marking the smallest back-to-back gains in more than two years. Australia’s CPI reading follows reports suggesting its economy remains resilient, putting the central bank on track to engineer a soft landing. 

The RBA paused this month and last to assess the impact of its tightening campaign amid a mixed economic picture — consumers have slowed spending as they are forced to allocate a rising proportion of their incomes to repayments while corporate confidence is still holding up. 

Retail sales earlier this week showed household spending exceeded expectations in July, though on an annual basis consumption has flatlined. Separate data on Wednesday showed the pace of construction work grew 0.4% in the second quarter, well short of expectations for a 0.9% gain, while building approvals slumped 8.1% last month after a 7.9% decline in June.

On the flip side, the labor market persists in defying the RBA’s rate hikes with hiring staying strong and the jobless rate holding in a 3.5-3.7% range over the past year. 

Today’s quarterly CPI report also showed:

  • The most significant contributors to the annual increase were housing, up 7.3%, and food and non-alcoholic beverages, 5.6% higher
  • Partly offsetting those gains were falls in automotive fuel, down 7.6%, and fruit and vegetables, 5.4% lower
  • The annual trimmed mean gauge, another core measure, eased to 5.6% in July from 6% a month earlier

--With assistance from Tomoko Sato and Matthew Burgess.

(Adds comments from economists, updates market reaction.)

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