(Bloomberg) — Australia’s core inflation eased by more than expected in the final three months of 2024, opening the door to an interest-rate cut as soon as next month and sending the currency lower.
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The annual trimmed mean gauge of consumer prices, which shaves off volatile items, rose 3.2% in the three months through December, compared with an expected 3.3% gain, data from the Australian Bureau of Statistics showed Wednesday. On a quarterly basis, core consumer prices rose 0.5% versus a forecast 0.6%.
The Reserve Bank, which aims for the midpoint of a 2-3% CPI target, is focused on core inflation because government subsidies are suppressing headline prices. Trimmed mean CPI hasn’t been inside the band since the end of 2021.
The currency slid and the yield on policy sensitive three-year government bonds declined as much as 7 basis points. Stocks extended gains as money markets boosted bets on a February rate cut to better than 90%.
“Today’s data cements a February rate cut,” said Diana Mousina, deputy chief economist at AMP Ltd. who had been “on the fence” until now, adding that the arguments to cut are stronger than those to hold.
“Even if you look at the problem areas — rents, medical and eating out — you can see quite a significant slowing in inflation,” she said. “It tells me that the period of goods inflation is over and what you want to see is services inflation slow a bit further from here.”
Today’s result will buttress the RBA’s growing confidence that inflation is on track to return sustainably to target in a reasonable timeframe. At their last meeting in December, policymakers pivoted to a more dovish stance and discussed scenarios in which rates might be lowered or remain at current restrictive levels.
They assessed that either outcome was plausible and opted to hold rates at 4.35%, a 13-year high that has been in place since late 2023.
What Bloomberg Economics Says…
“The downside miss to the RBA’s projections will likely prompt the central bank to trim its inflation forecasts by enough to greenlight the beginning of its easing cycle despite recent robust labor market readings.”
— James McIntyre, economist
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Still, there remain reasons for the RBA board to take a cautious approach when they meet in just under three weeks’ time.
Annual services prices remain elevated at 4.3%, led by rents, medical and hospital services and insurance, the ABS said.
The inflation report also showed non-discretionary goods and services fell 0.5% during the quarter, while discretionary rose 1.1%, marking the first time in nearly four years that inflation in non-discretionary items is lower than for discretionary items.
That underscores recent data that consumer spending has picked up, while the labor market has remained strong — pointing to the risk of persistent inflation pressures. The RBA is sensitive to the possibility that revived consumption and the strong jobs market may combine to frustrate efforts to bring core inflation down to target.
“These data make February’s RBA meeting a live one,” said Sean Langcake, head of macroeconomic forecasting for Oxford Economics Australia “However, the bank will be mindful that the economy is still running close to its capacity and cost pressures are elevated. Moreover, as the impact of subsidies unwind, headline inflation will pick back up in the coming quarters.”
At the same time, Australia will soon be headed to the polls and economists fear that both sides of politics will be tempted to unleash major spending initiatives to try to sway what’s expected to be a tight election.
The RBA, in tackling inflation through 2022-23, opted for a lower peak rate than global counterparts. It worried about the capacity of heavily-geared households to cope with significantly higher mortgage repayments.
Australia has been a global outlier in the current easing cycle as most developed world central banks, including the Federal Reserve, have already cut substantially. The Fed is due to announce the outcome of its meeting later today and is expected to stand pat.
The RBA’s baseline scenario is for unemployment to peak at 4.5% this year, up from 4% now. The central bank forecast in November that the trimmed mean would end 2024 at 3.4% before easing to the top of the inflation target by mid-2025. The bank will publish updated forecasts on Feb. 18 together with its rate decision.
Wednesday’s inflation report also showed:
Education, health and insurance drove the gains, reflecting the strength of the services side of the economy
Non-tradables prices, which are largely affected by domestic variables like utilities and rents, climbed 3.1%
Tradables prices, which are typically impacted by the currency and global factors, advanced 1.1%
–With assistance from Matthew Burgess and Garfield Reynolds.
