Australian Inflation Eases, Sparking Hopes of an Interest Rate Cut

People shop for fresh produce at the Queen Victoria Market in Melbourne, Australia on July 4, 2023. William West/AFP via Getty Images

Australia’s annual inflation slowed down in the December, sparking hopes the Reserve Bank of Australia (RBA) could consider an interest rate cut.

Australian Bureau of Statistics (ABS) data showed trimmed mean annual inflation, which excludes items extremely price volatile items, moderated to 3.2 percent in the 12 months to December, down from 3.6 percent in September.

Meanwhile, the consumer price index (CPI) eased to 2.4 percent in the 12 months to December, down from 2.8 percent in September.

“The main reasons for lower CPI inflation were due to a fall in prices for electricity and automotive fuel and moderating price rises for new dwellings,” the ABS said.

The Australian Stock Exchange benchmark index appeared to respond positively, rising 0.7 percent at the time of writing.

The RBA’s preferred measure of inflation is trimmed mean inflation, but it also looks at headline inflation and other measures. The bank targets an inflation rate of 2 to 3 percent.

Trimmed mean inflation excludes extreme seasonal price movements up or down to volatile goods or services such as fuel.

“This quarter the trimmed mean excluded the falls in both electricity and automotive fuel, alongside other large price rises and falls,” the ABS explained.

Services inflation in 12 months to December remained elevated at 4.3 percent in December, down slightly from 4.6 percent in the September quarter.

“Higher prices for rents, medical and hospital services and insurance were the main contributors to Services inflation remaining elevated,” the ABS said.

Looking at the December quarter alone, the CPI increased 0.2 percent, the same as the September figure. Both the latest quarters have eased compared to March and June 2024, when CPI was at 1 percent.

ANZ Predicts Rate Cut for February

ANZ senior economist Catherine Birch noted electricity had subtracted 0.6 percent from annual headline inflation due to federal and state government rebates, while fuel took off a further 0.3 percent in the quarter.

Birch said the RBA would likely look through headline inflation due to these temporary effects, along with the impacts of other cost of living relief measures at its next interest rate meeting.

“We think this will be enough for the RBA to cut the cash rate by 25 basis points at its February meeting,” she said in a research note to investors.

Politicians Respond

Treasurer Jim Chalmers said underlying inflation is now at a three-year low according to the new figures today.

“Headline inflation is around the middle of the RBA’s target band. On every measure, we’ve made substantial and sustained progress in the fight against inflation,” he said on X.

Speaking to reporters, Chalmers said the inflation figures were much better than the market expected and lower than forecast.

“We have been able to get on top of this inflation challenge and to get it down in a very meaningful way. Inflation is now almost a third of the 6.1 percent that we inherited when we came to office,” he said.

He said this meant Australia’s headline inflation was now lower than the majority of advanced economies including the United States, the UK, and Germany.

“What these numbers show is we have been able to achieve something that other countries cannot—it is to make this remarkable progress on inflation at the same time as we maintain the gains were made in the labour market and keep the economy ticking over,” he said.

However, Shadow Treasurer Angus Taylor said cost of living pain was far from over for Australians.

“We’re absolutely at the back of the pack in beating inflation and getting the low-inflation strong economy we all want to see,” Taylor told reporters.

“We’ve got a treasurer more interested in spin than substance, more interested in rhetoric than reality, but the reality of Australian families and Australian businesses—and we’ve seen it here today—is the pain continues.”

Taylor said core inflation remained stubbornly “above target,” with cost pressures impacting businesses across Australia.

“Services inflation is subbornly above 4 percent. It hasn’t moved much in the last 12 months and underneath that is a situation where Australians continue to pay more at the checkout,” he said.