Inflation stays at 2-year low

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.

Treasurer Jim Chalmers welcomed the CPI data, stating: "This is the equal lowest in more than two years and much lower than the 6.1 per cent that we inherited when we came to office.

"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."

He flagged that the Labor's key objective is to help Australians earn more and keep more of what they earn at the same time, noting the cost‑of‑living tax cut from 1 July.

How did CPI fare against forecasts, and what next for the RBA?

Bank economists have reacted to the figures, with Westpac noting the January print of 3.4 per cent was below their forecast of 3.9 per cent.

Westpac's economic team observed a balance in risks around their March quarter inflation forecasts, particularly emphasising the impact of durable goods prices on the quarterly forecast.

It flagged that total housing costs were materially lower than the +1.4 per cent it had forecast, driven by weaker-than-expected electricity and dwelling prices.

Its economists added: "Dwelling prices were also weaker than expected lifting 0.1 per cent in the month, the softest rate since mid-2023. Dwelling price increases can be a bit lumpy so we are cautious about extending this soft update into the next few months. Rents rose as expected, increasing 0.7 per cent over the month."

Additionally, Westpac said it anticipates potential further power bill rebates this year amidst ongoing discussions on cost-of-living pressures, expecting these effects to manifest in the June quarter.

ANZ, which was forecasting CPI to be 3.6 per cent, said that the figure presented "some downside risk" to its 1Q24 forecast of 0.7 per cent q/q.

'The January data are underweight services and non-tradables though, so we will wait for the February data to better assess how domestic price pressures are tracking," its economics team said.

CBA - which had expected CPI to come in at 3.5 per cent - said that while inflation was easing to near the RBA's target levels (between 2-3 per cent), the bank anticipates little impact on the upcoming RBA meeting.

Its economic team explained: "The relatively narrow scope of prices measured in January limits its usefulness for policy, with very few services prices collected.

"The takeaway for the RBA ahead of their March meeting will be that goods disinflation continued and housing‑related inflation remained very high. With no upside surprise to inflation in the data today, the focus will now turn to any potential downside surprise on the activity front with the Q4 23 GDP figures out next Wednesday (6 March)."

CBA's team said: "For us, today’s data does not shift our view that the inflation process remains a tale of two distinct parts. Discretionary inflation is coming down rapidly as non‑essential spending falls in response to real household disposable incomes squeezed by high inflation, a rising tax take and dwelling interest payable. However, non‑discretionary inflation remains high, particularly because of the housing‑related components of the CPI basket."

[Related; RBA releases reasoning behind cash rate decision]