Australia’s inflation eased to a two-year low in the December quarter, driven by slower increases in food and fuel prices, sparking speculation that the Reserve Bank of Australia (RBA) might consider an interest rate cut as its next move.
The Australian Bureau of Statistics reported that the consumer price index (CPI) rose by 4.1% in the final three months of 2023 compared to the same period in the previous year, lower than economists’ expectations of 4.3% and a notable decline from the 5.4% recorded in the September quarter.
Quarterly CPI growth was also subdued, increasing by 0.6%, half the pace of the previous quarter and below economists’ forecast of 0.8%. December’s CPI of 3.4% was likewise lower than the predicted 3.7%.
David Bassanese, Chief Economist at BetaShares, commented that the lower-than-expected CPI results should put to rest any remaining speculation about an imminent RBA rate hike. Treasurer Jim Chalmers welcomed the figures, noting the positive trends in inflation, real wages, and upcoming tax cuts.
Among the notable changes in prices, food and non-alcoholic beverages rose by 0.5%, with declines in lamb prices by 12.1% and beef and veal by 1.5% due to destocking by farmers. Automotive fuel prices decreased by 0.2% for the quarter, despite global geopolitical tensions following the war in Gaza. However, insurance costs accelerated, rising by 3.8% in the quarter and marking a 16.2% increase from a year earlier, the highest since 2001.
The RBA’s previous forecast had anticipated a year-end inflation rate of 4.5%, but with the latest CPI figures, expectations for a rate hike at the upcoming RBA meeting have dwindled. Instead, attention has turned to the possibility of rate cuts if inflation is projected to fall within the RBA’s target range of 2-3% by next year.
The trimmed mean measure of inflation, which excludes volatile price movements, increased by 4.2% annually. Retail sales for December showed minimal growth, with turnover just 0.8% higher than the previous year, indicating weakened consumer spending when adjusted for inflation.
In response to the CPI data, the Australian dollar fell by about 0.2 US cents to 65.8 US cents, while the Australian share market rose by approximately 0.25% as investors adjusted their expectations regarding future interest rate changes.
Cherelle Murphy, Chief Economist at EY, stated that the latest inflation data suggests that the RBA’s previous rate hikes have been effective, indicating no immediate need for further increases. However, she cautioned that domestic and international factors, such as strong housing demand and global supply chain issues, could still exert upward pressure on prices.
Housing costs increased by 1%, while rents rose by 0.9%, a slowdown from the previous quarter’s 2.2% growth. Despite this moderation, rents were still up by 7.3% compared to the previous year. Furnishings and household equipment saw a notable decline of 1% in the quarter.
Overall, non-discretionary goods and services rose by 4.8% annually and 0.6% in the quarter, potentially squeezing household budgets despite expected wage increases. Discretionary goods and services increased by 3% annually compared to the previous year.
There was a noticeable divergence between tradeable and non-tradeable goods and services, with tradeables experiencing a slower annual increase of 1.5%, attributed to reduced global disruptions and lower prices in China. Non-tradeables, however, rose by 5.4% annually.
Electricity prices increased by 1.4% in the December quarter, a significant slowdown from the previous quarter’s pace. The ABS attributed this deceleration partly to the timing of government energy bill rebates, which mitigated the impact of rising wholesale prices.
Looking ahead, there is growing anticipation that electricity prices will decrease after July 1, following a fall in wholesale prices in 2023. The data from various cities showed Hobart with the lowest annual increase at 3.3% and Adelaide with the highest at 4.8%.
The latest inflation figures have raised expectations for a potential interest rate cut by the RBA as the focus shifts to sustaining economic growth amid evolving global and domestic conditions.
(Source: Forexlive | WDRB | SFGate)
