Rate relief in sight as inflation drops to 4.1 percent

Inflation fell to a two-year low of 4.1 percent per annum in the December quarter, according to figures released by the Australian Bureau of Statistics. This is well below the Reserve Bank (RBA) forecast of 4.5 percent, with CBA’s head economist Gareth Aird saying it “should be a straightforward decision” for the RBA to keep rates on hold at its first meeting for 2024 next week.

Michelle Marquardt, ABS head of prices statistics, said the consumer price index (CPI) rose 0.6 percent in the December quarter, which was the smallest quarterly rise since the March 2021 quarter. Annual CPI has now fallen from a peak of 7.8 percent in the December 2022 quarter to 7 percent in the March 2023 quarter, 6 percent in the June quarter, 5.4 percent in the September quarter and sharply lower to 4.1 percent in the December quarter.

The most significant price rises in the December quarter were for tobacco, up 7 percent following the introduction of the 5 percent annual tobacco excise indexation; domestic holiday travel and accommodation, up 3.9 percent; and insurance, up 3.8 percent. “The increase in insurance was due to higher premiums across motor vehicle, house and home contents insurance,” Ms Marquardt said. “Over the past twelve months, insurance rose 16.2 percent, making it the largest annual rise since March 2001.”

Housing costs rose by 1 percent over the quarter, driven by new dwellings purchased by owner–occupiers, up 1.5 percent; rents, up 0.9 percent; and utilities, up 0.6 percent. “Higher labour and material costs contributed to price rises this quarter for construction of new dwellings, Ms Marquardt said. CoreLogic head of research Eliza Owen commented that rental inflation “is finally slowing, suggesting some hope for tenants that the rental market could turn a corner in 2024, which is also indicated by CoreLogic rent measures”.

Annual goods inflation continues to moderate faster than services. December was the fifth consecutive quarter of lower goods inflation, down from a peak of 9.6 percent in the September 2022 quarter to 3.8 percent in the December 2023 quarter. Prices have even fallen in some categories over the past 12 months, such as clothing, footwear, furniture and household appliances. Annual services inflation eased for the second consecutive quarter, down from a peak of 6.3 percent in the June quarter to 4.6 percent in the December quarter.  

Federal Treasurer Jim Chalmers said the government’s cost-of-living relief measures were directly contributing to a reduction in inflation. “Our cost of living policies took half of a percentage point off inflation through the year to December quarter 2023,” Dr Chalmers said. The ABS figures show that over the year, electricity prices rose 6.9 percent but would have risen 18.9 percent without the Energy Bill Relief Fund rebates. Childcare prices fell 7.2 percent but otherwise would have risen 13 percent.Rents rose 7.3 percent but would have risen 8.9 percent without the largest increase to Commonwealth rent assistance in 30 years.

Mr Aird said the inflation data would be “viewed favourably by policymakers”. He added: “The fall in the rate of inflation over the past year has been swift. The job of returning inflation to the 2-3 percent target band is not yet done. But the RBA is now on the home straight. We continue to expect an easing cycle commencing in September. We have 75bp of rate cuts in our profile in late 2024 and a further 75bp of easing in H1 25, which would take the cash rate to 2.85 percent.”