Costs up but pace of climb is slower

Rate rises now less likely

Inflation eased in the December quarter to its lowest level in two years, all but guaranteeing the Reserve Bank has finished its aggressive run of rat hikes.

The consumer price index, a gauge of the prices individuals pay for a broad range of goods and services, eased to 4.1 per cent in the year to December, from 5.4 per cent in the September quarter, the Australian Bureau of Statistics said on Wednesday.

In the December quarter alone, inflation slowed to 0.6 per cent, its lowest quarterly reading since March 2021.

The annual pace of inflation was lower than consensus forecasts of 4.3 per cent, reinforcing expectations the cash rate will be kept on hold at 4.35 per cent at the first RBA meeting for 2024, on February 6.

But while the result undershot the RBA’s forecasts for 4.5 per cent, borrowers will likely have to wait until mid-year for rate cuts.

Following the fresh figures, bond traders revised their expectations for rate cuts, ascribing a 78 per cent chance of a cut at the RBA’s June meeting.

Money markets are fully priced for a rate cut in August, followed by a follow-up cut in December, which would lower the cash rate to 3.85 per cent by year’s end.

Over the quarter, consumers paid less for household goods, transport, education, and for some groceries including beef, lamb, fruit and vegetables.

Motorists received some relief at the bowser, with average unleaded petrol prices falling from a high of $2.13 per litre in early October, to a low of $1.78 per litre in mid-December.

But other goods like tobacco, which jumped 7 per cent, new dwellings, up 1.5 per cent, and domestic holidays, up 3.9 per cent, were substantially more expensive.

Inflation in the labour-intensive services sector, which RBA governor Michele Bullock has cited as the growing cause of Australia’s inflation challenge, fell from 5.8 per cent to 4.6 per cent.

The RBA’s preferred measure of underlying price pressures – trimmed mean inflation, which strips out volatile items such as food and petrol – also slipped to 4.2 per cent, down from 5.1 per cent in September.

The RBA has aggressively tightened monetary policy since May 2022 in an effort to cool the economy and bring inflation to heel.

Under the weight of 13 rate hikes, the economy has exhibited recent signs of slowing.

Retail sales data, released on Tuesday, revealed spending over the Christmas sales period plunged by 2.7 per cent. The jobs market has also loosened after the economy shed more than 65,000 jobs last month.

But as inflation eased from its peak of 7.2 per cent in late 2022, the economy has still proven surprisingly resilient, buoying expectations that Australia is on track for a soft landing – that is a return of inflation to the RBA’s 2 to 3 per cent target without triggering a recession.

The International Monetary Fund on Tuesday affirmed the view that the global economy is set to avoid a recession.