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New CPI figures have shown that inflation continues to fall, stoking hopes that the central bank will start its easing cycle next month.
The Consumer Price Index (CPI) has remained within the Reserve Bank of Australia’s (RBA) target range for the second quarter in a row, according to the latest data release from the Australian Bureau of Statistics (ABS).
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ABS data released today (29 January) has revealed that the CPI rose by a marginal 0.2 per cent this quarter, taking the annual inflation down to 2.4 per cent in the December quarter, down from 2.8 per cent in the September quarter.
The quarterly CPI figure remains within the RBA’s target band of 2-3 per cent, however, the falling inflation figures have been largely down to government interventions — such as Commonwealth Rent Assistance (the maximum rate for which increased by 10 per cent in September 2024) and energy rebates — rather than natural price drops.
The main contributors to the 0.2 per cent quarterly rise were recreation and culture (up 1.5 per cent) and alcohol and tobacco (2.4 per cent higher). However these were largely offset by 0.7 per cent falls in both housing and transport.
The quarterly growth in recreation and culture was driven by seasonal domestic holiday travel and accommodation (up 5.7 per cent).
The 2024-25 Commonwealth Energy Bill Relief Fund rebates contributed to a 9.9 per cent fall in electricity prices, following a drop of 17.3 per cent in the September 2024 quarter.
New dwelling prices also dropped, down 0.2 per cent, the first quarterly fall since the June 2021 quarter. Price growth for new dwellings has slowed in recent months, the ABS highlighted, as project home builders offer incentives to attract new buyers due to weak demand.
Automotive fuel prices fell 2.0 per cent for the quarter, following a 6.7 per cent drop in the September 2024 quarter, reflecting lower global oil prices.
Underlying inflation (designed to reduce the impact of irregular or temporary price changes that can impact the figures) is still slightly higher than the RBA’s target band. For example, the trimmed mean annual inflation sat at 3.2 per cent during the December 2024 quarter, according to the ABS, down from 3.6 per cent in the September quarter.
A key driver of lower underlying inflation was annual goods inflation, which eased to 0.8 per cent, its lowest level since 2016, down from 1.4 per cent in the previous quarter.
The drop was primarily due to large falls in electricity and automotive fuel prices and lower price rises for new dwellings.
Non-discretionary inflation, which includes goods and services that households are less able to reduce their consumption of like food and automotive fuel, fell to its lowest since 2021, at 1.8 per cent.
Annual services inflation was 4.3 per cent in the December quarter, down from 4.6 per cent in the September quarter.
Higher prices for rents, medical and hospital services and insurance were the main contributors to services inflation remaining elevated.
Michelle Marquardt, ABS head of prices statistics, said: "December quarter’s rise was the same as the 0.2 per cent increase in the September 2024 quarter. These rises were the lowest recorded since the June 2020 quarter when the CPI fell during the COVID-19 outbreak when childcare was free.
“Annually, the December quarter’s rise of 2.4 per cent was down from 2.8 per cent in the September quarter.”
Will the RBA cut rates in February?
Lenders are generally expecting rate cuts in the first half of this year, with Westpac Group (Westpac) having now brought forward its call for the first cash rate reduction to February 2025. The bank noted the new CPI data as a key reason for moving its forecast for the easing cycle from May to February.
Earlier this month, Australia and New Zealand Bank (ANZ) adjusted its cash rate forecast, saying the RBA would likely cut interest rates by 25 basis points (bps) at its February meeting. Its economists believe that there will be two 25-bp cuts in this cycle (in February and August 2025), taking the cash rate to 3.85 per cent.
The major joined the Commonwealth Bank of Australia (CBA) in its predictions for when a rate reduction will occur. However, while CBA believes the RBA may cut rates next month, it thinks there will be 100 bps of easing over 2025 (one 25-bp cut per quarter). This would take the cash rate to 3.35 per cent.
National Australia Bank (NAB) economists have, however, argued that February may be too early for a rate cut, given that inflation has largely been decelerating due to government intervention and comes amid low unemployment. It believes that the central bank will instead cut rates at the following meeting, in May.
However, lenders are preparing for incoming rate cuts. Earlier this month Macquarie Bank dropped interest rates on some of its fixed-rate mortgages, in preparation for potential rate cuts.
The growing expectations that the cash rate will fall at least once this year, is also leading to buoyed consumer sentiment towards housing.
The Westpac-Melbourne Institute’s ‘time to buy a dwelling’ index rebounded by just over 10 per cent in January, to 89.9, more than reversing the fall recorded in December and signalling growing confidence among home buyers.
However, property analytics company CoreLogic recently suggested that even though the easing cycle may begin soon, this may not necessarily benefit home buyers - who will still be hamstrung by high serviceability and house prices.
[Related: Don’t expect surge in home values after rate cuts: CoreLogic]
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