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Cooling inflation gives merit to rate cut discussions

By Jessica Penny
4 minute read

The ABS has released its monthly consumer price index indicator.

Inflation rose 3.4 per cent in the 12 months to January 2024, according to the latest monthly consumer price index (CPI) indicator from the Australian Bureau of Statistics (ABS), down from 4.3 per cent a month earlier.

The increase represented the lowest annual inflation since November 2021, the ABS reported.

It also came in below market forecasts of a 3.6 per cent rise.

Excluding volatile items from the CPI, such as fuel and holiday travel, the ABS said the annual rise in January was 4.1 per cent, down from 4.2 per cent in December.

“Annual inflation when excluding volatile items has been declining since the peak of 7.2 per cent in December 2022,” said Michelle Marquardt, ABS head of prices statistics.

Among the biggest contributors to the January annual increase was insurance and financial services (+8.2 per cent), while partially offsetting the rise was holiday travel and accommodation (-7.1 per cent).

Housing’s rise of 4.6 per cent in the 12 months to January was down from 5.2 per cent in December, driven by new dwelling prices rising 4.8 per cent over the year with builders passing through higher costs for labour and materials.

Rent prices, meanwhile, rose 7.4 per cent over the same period on the back of a tight rental market and low vacancy rates across the country.

Commenting on the data, Treasurer Jim Chalmers said: “The direction of travel is clear: inflation is moderating helped by the Albanese government’s cost‑of‑living policies.

“Inflation is still too high but we are making welcome progress.”

The latest inflation figure has provided further hope that interest rates could come down soon.

Economist and former Labor politician Craig Emerson said on his X profile: “Inflation figures out today show inflation is coming down faster than the Reserve Bank has been forecasting. The Reserve Bank should not keep interest rates higher for longer at the expense of people’s jobs.”

AMP’s Shane Oliver also took to the social media platform to share his thoughts, noting that while the inflation data for January is “good news”, the RBA is likely to retain its mild tightening bias at its next meeting.

“It would still see inflation as too high, services inflation remains sticky (Jan 3.7 per cent) and it would like to see more evidence lower inflation will be sustained.”

CBA, on the other hand, said the January inflation data has less weight for policy deliberations under the new schedule.

For us, today’s data does not shift our view that the inflation process remains a tale of two distinct parts, the big four bank said.

Discretionary inflation is coming down rapidly as non-essential spending falls in response to real household disposable incomes squeezed by high inflation, arising tax take and dwelling interest payable. However, non-discretionary inflation remains high, particularly because of the housing-related components of the CPI basket.”

Earlier this month, the RBA revealed that it considered whether to raise the cash rate target by a further 25 basis points or leave it unchanged at its meeting in February.

The bank explained that given its expectation that inflation would take a further two years to return towards the midpoint of the target range, members considered increasing the cash rate in February to reduce the risk of inflation not returning to target in an acceptable timeframe.

However, many have labelled the RBA’s latest inflation forecast as too conservative, with Deutsche Bank cautioning last month that the RBA should be “cutting more and earlier, rather than less and later”.

Following its February rate call, the RBA announced its revised inflation forecast which points to a drop in inflation to 3.3 per cent (instead of the earlier predicted 3.9 per cent) by June.

From there, however, the RBA expects inflation to ease at a snail’s pace, reaching 3.2 in December and 3.1 per cent six months later. By the end of 2025, inflation is expected to finally hit the target band by reducing to 2.8 per cent, before dropping further to 2.6 in June 2026.

“History suggests the RBA’s latest forecasts are at risk of proving too conservative,” the financial institution’s chief economist for Australia, Phil O’Donaghoe, told InvestorDaily at the time.

“The RBA suggested that a ‘further increase in interest rates cannot be ruled out’, we would instead argue more emphatically that a May rate cut cannot be ruled out. Recent data could well mark a turning point. And at turning points, it pays to be nimble,” he added.

Dr Oliver predicts that the RBA will adopt an easing bias in May.