Rate relief in sight as inflation drops to 4.1 percent
CBA head economist says CPI came in well below the Reserve Bank’s forecast of 4.5 percent
2 min
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.”
Rising rates, construction inflation and shrinking investor confidence are pushing Australia deeper into a dangerous housing spiral that monetary policy alone cannot fix.
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Rising rates, construction inflation and shrinking investor confidence are pushing Australia deeper into a dangerous housing spiral that monetary policy alone cannot fix.
2 minThe Reserve Bank had little choice but to raise interest rates again this week.
Inflation was already proving stubborn before the latest Middle East instability added further pressure to energy prices and supply chains.
Housing inflation alone has averaged six per cent over the past year, remaining one of the single biggest contributors to CPI.
But while the focus remains on rates, the deeper problem is structural and far more dangerous.
Australia is not building enough homes, and the conditions required to fix that are deteriorating simultaneously.
Construction costs remain elevated. Builders are increasingly unwilling to absorb contract risk. Labour shortages persist.
Capital is becoming more expensive. And as borrowing capacity weakens and sentiment softens, fewer projects are becoming financially viable.
The result is a self-reinforcing cycle.
The RBA raises rates to fight inflation. Higher rates reduce development feasibility. Fewer projects start. Housing supply tightens further. Rents rise. Inflation persists. The RBA raises rates again.
The only long-term solution is supply, yet Australia remains nowhere near the National Housing Accord target of 240,000 new dwellings a year.
Completion continues to lag approvals, meaning many projects approved on paper are simply never making it out of the ground.
That gap matters enormously because housing is not just another sector of the economy.
Around two-thirds of Australian household wealth is tied to property, while the sector underpins millions of jobs and related industries. Weakness here quickly spreads beyond real estate.
We are already seeing signs of stress. Auction clearance rates in Sydney and Melbourne have softened, borrowing capacity has declined, and parts of the market are experiencing price corrections as confidence weakens.
At the same time, policymakers continue to debate tax measures such as changes to negative gearing and capital gains tax discounts, despite fears that such reforms could drive private capital out of the rental market at precisely the moment when supply is most constrained.
This is the paradox at the centre of Australia’s housing crisis.
Demand for property remains extraordinarily high, yet the economic conditions required to actually build new housing are worsening.
The Reserve Bank cannot solve that problem alone.
Monetary policy cannot accelerate planning approvals, reduce construction costs or create more tradies. It can only raise the cost of money until something eventually breaks.
And increasingly, that “something” looks like the development pipeline itself.
Paul Miron is the Co-Founder & Fund Manager of Msquared Capital.
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