Inflation shock eases

Slower pace of price rises gives hope of earlier rate cut

Inflation rose less sharply than anticipated in January, indicating the Reserve Bank’s interest rate increases are working through the economy as intended and bolstering hopes rate cuts may come sooner than expected.

Consumer prices rose 3.4 per cent in January from a year earlier, unchanged from their reading in December, the Bureau of Statistics reported, lower than the 3.6 per cent increase expected.

Economists say the softer-than-expected inflation result could enable the RBA to bring forward the timing of rate cuts – but not at its next board meeting on March 18-19, when it is expected to keep rates on hold for a third consecutive time after bolstering rates to a 12-year high of 4.35 per cent at its November 2023 meeting.

Ahead of Wednesday’s inflation update, markets were fully priced for a rate cut at the RBA’s November meeting, which would bring the cash rate to 4.1 per cent.

“We believe (the RBA) might reduce the cash rate sooner and faster than currently envisaged,” KPMG chief economist Dr Brendan Rynne said.

Fresh GDP figures, to be released by the ABS next week, would provide further clues on where the RBA would move next, Dr Rynne added.

“There is a risk that Australia could not only be in a percapita recession but could also tip into a technical recession.”

Betashares chief economist David Bassanese agreed the central bank could cut more aggressively than anticipated.

“The CPI result remains consistent with my view that the RBA will have capacity to cut interest rates at least twice in the final months of 2024,” he said.

But EY senior economist Paula Gadsby said the result should be “read with some caution” given limitations with the data.

“Talks of rate cuts could be premature as risks persist into 2024, especially if wages growth – the major driver of inflation – fails to ease, and productivity doesn’t pick up to the long-run levels the Reserve Bank is counting on,” she said.

Analysts have said the monthly reading, which has a higher representation of goods and is more volatile, would probably overstate the progress made on reducing price pressures.

Inflation has cooled sharply in recent months, easing from a peak of 8.4 per cent in December 2022 as the RBA aggressively tightened monetary policy.

In its latest set of forecasts, the RBA expects consumer price growth to remain above its 2 to 3 per cent inflation targeting band until the second half of 2025.

January’s result was driven by higher prices for food and non-alcoholic beverages, up 4.4 per cent, housing, up 4.6 per cent, alcohol and tobacco, up 6.7 per cent, and insurance and financial services, up 8.2 per cent.