January Inflation Data May Bring Forward Rate Cuts

Inflation in Australia remained steady at 3.4% in January, a two-year low, according to the Australian Bureau of Statistics (ABS). This figure is below economists’ predictions of a rise to 3.6%, fuelling hopes that the Reserve Bank of Australia (RBA) may bring forward interest rate cuts.

The Consumer Price Index (CPI), a key indicator of inflation, has been influenced by various factors. Food and non-alcoholic beverages saw an increase in annual inflation to 4.4% last month from 4% in December. However, meat and seafood prices were down 2% from a year earlier, contributing to the overall flat inflation rate.

Government intervention has also played a role in curbing price increases. For instance, electricity prices were only 0.8% higher than a year ago in January, with rebates moderating the rise. Without these rebates, electricity prices would have surged by 15.3% in the 12 months to January 2024.

Housing costs, particularly rents, continued to post large increases. The 7.4% rise in rental costs from January 2023 matched the rise reported for December. Treasurer Jim Chalmers stated that rents would have risen 9.1% without the government’s boost to Commonwealth Rent Assistance.

Despite these pressures, the direction of travel is clear: inflation is moderating. This is partly due to the Albanese government’s cost-of-living policies. However, as Chalmers noted, “it’s not mission accomplished because people are still under the pump.”

The RBA is keen to ensure that inflation remains on course to return to within its target range of 2%-3% by next year and to about 2.5% by 2026. It raised its cash rate 13 times between May 2022 and November 2023 to a 12-year high of 4.35%. However, the bank noted that goods price inflation had declined more than expected, while services inflation remained high and was expected to decline only gradually.

Investors estimated the chance of a cut in the RBA’s key interest rate was about 5% when the board next meets on 18-19 March. This comes after a review of the central bank’s operations released last year, which resulted in the RBA board meeting eight times a year instead of 11.

As households change their spending habits over the years, the ABS has to adjust the weighting given to each category to estimate how much overall prices are changing in the economy. On Wednesday, the ABS updated the basket of goods and services, bringing some of the weightings closer to pre-Covid levels.

The share of goods reached 58% of the CPI index at one point, and just 42% on services. The 2024 update has revised the share to 54.5% for goods and 45.5% for services, a move that “reflects spending patterns closer to the pre-Covid-19 period”, the ABS said.

The recreation and culture group category has seen a big adjustment, rising 1.71 percentage points in the rejig. The fact more Australians headed overseas and with international airfare prices remaining elevated, the weighting of this sub-category increased 0.92pp.

Overseas arrivals and departures are now back to about 90% of pre-Covid levels, the ABS said. In January’s figures alone, holiday travel and accommodation was 7.1% cheaper than a year earlier, not far off the 9.1% year-on-year drop reported in December.

After the 2024 CPI weighting update, housing remained the largest category, accounting for 21.74% of the overall index. That was half a percentage point lower than for last year, dragged down by fewer people buying new homes.

Food and non-alcoholic beverages, with a weighting of 17.15%, were little changed from the 2023 index. Recreation and culture at 12.55% leapfrogged transport’s 11.42% to contribute the third largest weighting within the CPI index.

In conclusion, while inflation remains a concern, the steady rate and the government’s interventions offer some reassurance. The RBA’s decisions in the coming months will be crucial in steering the course of the economy amidst these shifting tides.