Australia’s inflation rate retreats to two-year low fanning hopes next RBA move will be a rate cut
Australia’s inflation retreated to a twoyear low in the December quarter as food and fuel prices increased at a slower pace, fanning hopes the next move by the Reserve Bank will be an interest rate cut.
The consumer price index came in at 4.1% in the final three months of 2023 compared with a year earlier, the Australian Bureau of Statistics said on Wednesday. Economists had expected CPI to come in at 4.3%, easing from the September quarter pace of 5.4%.
For the quarter alone, CPI rose 0.6%, or half the pace of the September quarter. Economists had tipped the quarterly rate would be 0.8%.
For December alone, CPI was 3.4%, also lower than the 3.7% pace predicted by economists.
“The lower-than-expected December quarter consumer price index result should effectively kill off any lingering chance of an RBA rate hike next week,” said David Bassanese, the chief economist at BetaShares.
The treasurer, Jim Chalmers, welcomed the CPI figures. “What we’re seeing here is inflation is slowing, real wages [are] growing, and from the first of July we will see tax cuts flowing,” he said.
“This is not mission accomplished, but it’s really welcomed and it’s really encouraging progress.”
Among the key movers, food and non-alcoholic beverages rose 0.5% in the quarter, with lamb prices falling 12.1% and beef and veal 1.5% as farmers destocked. Automotive fuel prices were also down 0.2% for the quarter even with the eruption of the war in Gaza after the 7 October attacks against Israel.
Insurance costs, though, rose 3.8% in the quarter, quickening from September’s 2.8% pace. The 16.2% increase from a year earlier was the most since the March quarter of 2001, the ABS said.
The RBA had forecast in November that inflation would end 2023 at an annual rate of 4.5%. Prior to today’s CPI figures, investors saw minimal chance the central bank would lift its cash rate from 4.35% when its board meets for the first time this year next Monday and Tuesday.
Attention is instead focusing on how soon the RBA will start cutting interest rates if it becomes confident inflation will drop back within its 2-3% target range before the end of next year. The trimmed mean measure of inflation that strips out more volatile movers was up 4.2% in the quarter from a year earlier.
Retail sales figures for December out on Tuesday showed turnover was just 0.8% higher than a year earlier, implying spending sank once inflation was deducted and underscoring weakness in the economy. Excluding the Covid lockdown periods, retail growth was the weakest since July 2000, the Commonwealth Bank said.
The dollar fell about 0.2 US cents to 65.8 US cents and the Australian share market added about 0.25% as investors trimmed their bets for any more interest rate rises, with the ASX200 share index later rising to a record high.
The EY chief economist, Cherelle Murphy, said the inflation data showed the RBA’s 13 rate rises since May 2022 had worked and there was “no reason to lift the cash rate next week”.
However, mortgage holders will likely have to remain patient about early rate cuts. “Domestic sources of inflationary pressures are still present – including continued strong demand for housing, rising insurance premiums and a tight labour market,” Murphy said.
“International sources, including conflict in the Middle East and global shipping issues, could also be a source of upward pressure on energy and transport prices as the year rolls on,” she said.
Housing costs were up 1%, while rents rose 0.9% for the quarter, a reduction from the 2.2% pace in the September quarter. Rents were still rising at a 7.3% rate at the end of 2023 compared to a year earlier, marginally less than the 7.6% pace in the September quarter.
Furnishings and other household equipment fell the most of any category, dropping 1% in the quarter.
Non-discretionary goods and services were up 4.8% from a year earlier for the December quarter, and up 0.6% in the quarter itself. With wage increases likely to be running at about a 4% clip at the end of 2023, many households would still be getting squeezed in real terms.
By contrast, discretionary goods and services rose at a 3% pace in the December quarter compared to a year earlier.
There was also quite a wide difference between tradeable goods and services and non-tradeable ones. With Covid disruptions all but over and with China battling falling prices, tradeables were 1.5% more expensive than a year earlier – the slowest increase in almost three years. Non-tradeables, though, were up 5.4%.
Power prices in the December quarter were up 1.4%, or a third of the pace of increases in the September quarter, the ABS said.
Electricity prices were up 6.9% from a year earlier – less than the half the increase we saw in the September quarter. The timing of the government’s energy bill rebates made a difference. Since the June quarter, power prices are up 5.7% but without the rebates the increase would have showed up as a 17.6% hike, the ABS said.
There is increasing expectation that electricity prices will be lower after 1 July given the fall in wholesale prices in 2023, as reported last week.
Across the cities that the ABS surveys, Hobart posted the slowest annual increase at 3.3%, with Adelaide’s 4.8% increase the highest.