Inflation figures give 'green light' to rate cuts

The latest Consumer Price Index (CPI) figures released by the Australian Bureau of Statistics (ABS) has shown annual CPI inflation rose by 0.2 per cent to 2.4 per cent in the December quarter, down from 2.8 per cent in the September quarter.

According to the ABS, the primary case behind the lower print was due to declines in prices for electricity and automotive fuel, as well as moderating prices for new dwellings.

Meanwhile, trimmed mean (which provides a snapshot of underlying inflation) was 3.2 per cent, down from 3.6 per cent in the September quarter, returning below the Reserve Bank of Australia’s (RBA) forecast of 3.4 per cent.

This now marks the second quarter in a row where inflation has fallen into the RBA’s highly coveted 2-3 per cent range, and the first quarter where it has declined below the “midpoint” of 2.5 per cent.

ABS head of prices statistics, Michelle Marquardt said these rises were the “lowest recorded since the June 2020 quarter when the CPI fell during the COVID-19 outbreak when childcare was free”.

The main contributors to the 0.2 per cent quarterly rise were recreation & culture (1.5 per cent) and alcohol & tobacco (2.4 per cent), which were largely offset by falls in housing (0.7 per cent) and transport (0.7 per cent).

For annual inflation, significant declines in electricity (25.2 per cent) and fuel (7.9 per cent) along with easing inflation for new dwelling prices (2.9 per cent) contributed to the 2.4 per cent rise.

Reacting to the figures, Krishna Bhimavarapu, APAC economist at State Street Global Advisors, said: “Not only did the RBA’s preferred inflation metric (trimmed mean CPI) come in line with our below-the-market forecast, it is now also the lowest in 12 quarters!

"This should confirm the first rate cut next month and make it consensus. The key question now is when will economic growth improve?”

Callam Pickering, APAC economist at Indeed stated the RBA's February board meeting will be a "live" meeting, containing a "strong possibility that they could cut rates".

"It is by no means, however, a done deal and the RBA will be considering a wide range of data before they make a decision," he said.

“The latest inflation figures certainly increase the likelihood of a rate cut in February or April. It’s easy to ignore the decline in headline inflation, given the distortions created by government subsidies, but more difficult to ignore the improvements in underlying and service sector inflation.”

“On balance, we believe that the RBA will cut rates in February, with a second cut likely to occur in May or July. However, we think the RBA will be cautious in their approach due to concerns around productivity growth and the difficulties that could create for inflation going forward.”

Chief economist at Bendigo Bank, David Robertson, said a rate cut on 18 February is now "the most likely outcome".

"...although, we continue to suggest that this will be a shallow easing cycle, given a 'neutral' cash rate is 3.5 per cent.

Robertson suggested that should a rate cut occur in February, the second cut would most likely come in May as other factors including "jobs data and offshore developments remaining important".

Luci Ellis, chief economist at Westpac Group, remarked "it's on" as the better-than-expected inflation data tips the balance back to the previously forecasted February move.

"Normally it should not come down to one number. This round, however, the CPI has been the deciding factor because the message from other available data has been so mixed.

"With trimmed mean inflation at 0.5 per cent in the quarter (3.2 per cent/yr), we have just enough evidence to conclude that disinflation has proceeded faster than the RBA expected, so the Board will have the required confidence to start the rate-cutting phase in February," Ellis added.

Commonwealth Bank of Australia's (CBA) head of Australian economist, Gareth Aird, believes that the data shown has "given the green light" for the RBA to begin normalising the cash rate with a 25 basis point reduction.

"Headline inflation has been within the RBA's target bank for the past two quarters. And now the RBA's preferred measure of underlying inflation is now not far from the mid-point of the target band on a six-month annualised basis.

"We retain our call that we have held since late October last year that the RBA will cut the cash rate by 25bp at the February board meeting," Aird stated.

[RELATED: What’s in store for the December quarter CPI print?]

Adrian Suljanovic is a journalist at Broker Daily with more than two years experience reporting on all facets of the third party distribution channel.

Adrian has written for a range of business and finance titles including IFA, Investor Daily and Lawyer’s Weekly before joining the mortgages team in 2022.

He graduated from the University of Wollongong in 2021 gaining a Bachelor of Communication & Media with a major in Digital & Social Media.

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