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Steady inflation aligns with RBA’s shift in tone: Economists

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Most economists are interpreting the steady inflation in February as aligning with the RBA’s shift in tone away from a hiking bias.

The consumer price index (CPI) rose 3.4 per cent in the 12 months to February 2024, according to the latest monthly CPI indicator from the Australian Bureau of Statistics (ABS), in level with the 3.4 per cent lift a month earlier.

The CPI undershot market expectations of a 3.5 per cent rise.

“Annual inflation was unchanged in February and has been 3.4 per cent for three consecutive months,” said Michelle Marquardt, ABS head of prices statistics.

Despite the positive news, HSBC’s Paul Bloxham believes that the Reserve Bank (RBA) faces a challenge in reducing inflation from its current level in the 3s to the 2s due to the “stickiness” of the remaining elevated inflation components.

Coupled with strong wages growth, Bloxham said the scenario is holding up operating costs for businesses, which, in turn, is supporting elevated domestic inflation.

“Combined with a jobs market that is only very gradually loosening, the risk of another large rise in the minimum wage this year and support from expected fiscal loosening around mid-year, the ‘last mile’ of getting inflation back to the mid-point of the RBA’s 2–3 per cent target band may yet take some time,” the chief economist said.

“We see RBA rate cuts as unlikely in 2024.”

But Bloxham’s conservative view is not shared by the broader market.

Namely, CBA’s Stephen Wu declared that inflation looks to be moderating faster than the central bank expects.

“The undershoot on the inflation figures will be welcomed by the RBA,” Wu said.

“Today’s print looks lower than the RBA had forecast as recently as last month. And the downside miss for us means we will revisit our Q1 24 CPI forecast to incorporate today’s data.”

Acknowledging the lesser weight Wednesday’s CPI data carries on monetary policy, Wu nevertheless called it a “welcome print”, and one that is “consistent” with the RBA moving from a hiking bias to a neutral one at the March board meeting last week.

For CreditorWatch’s chief economist, Anneke Thompson, the latest CPI data does not change the outlook for future cash rate cuts.

“The first cut is still likely towards the end of Q3 2024 or even early Q4,” she said.

Similarly, AMP’s Shane Oliver said, “We still see rate cuts from mid-year.”

Noting that while parts of Wednesday’s report will keep the RBA cautious, Oliver declared the March quarter CPI inflation on track for 3.2 per cent, below the central bank’s 3.5 per cent forecast.

Earlier this year, the RBA released 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.

Economists, at the time, widely characterised this forecast as “conservative”, with concerns emerging regarding the possibility that the RBA may leave rates too high for too long.