- 29 Jan 2025
- By API Magazine
The latest eagerly awaited inflation data has shown a bigger than expected fall and delivered a forceful message to the RBA, which is now widely expected to lower interest rates in February.
Inflation has taken a bigger than expected fall in data released today, placing more pressure on the Reserve Bank of Australia to cut interest rates on 18 February.
The most politically sensitive data released by the Australian Bureau of Statistics (ABS) in some years, with an election looming and mortgage holders under stress, showed a larger than expected fall in trimmed mean inflation, the measure watched most closely by the RBA.
Annual trimmed mean inflation was 3.2 per cent in the December quarter, down from 3.6 per cent in the September quarter. Markets had factored in a fall to 3.3 per cent.
The headline Consumer Price Index (CPI), which includes volatile expenses, rose just 0.2 per cent in the December 2024 quarter and 2.4 per cent annually, down from 2.8 per cent in the September quarter and a crippling 7.8 per cent in December 2022.
The lower than expected figure means inflation is now tracking quicker than forecast to the RBA’s preferred band of 2 to 3 per cent.
With financial markets 84 per cent certain of an interest rate cut before the Wednesday (29 January) announcement, mortgage holders can now be almost certain of some interest rate relief when the RBA next meets. That rate cut expectation is now above 90 per cent.
Interest rates have been locked at 4.35 per cent since November 2023.
Michelle Marquardt, ABS Head of Prices Statistics, said inflation rises were the lowest recorded since the June 2020 quarter when the CPI fell during the Covid outbreak when childcare was free.
“The trimmed mean excluded price falls in both Electricity and Automotive fuel this quarter, alongside other large price rises and falls. As a result, trimmed mean annual inflation of 3.2 per cent was higher than CPI inflation of 2.4 per cent,” Ms Marquardt said.
When prices for some items move by large amounts, measures of underlying inflation like the trimmed mean can give more insights into how inflation is trending.
99,000 borrowers with houses on the line
An interest rate cut in a few weeks would be welcomed by many, and a lifesaver for some, mortgage holders.
A disturbing 38 per cent of Aussie homeowners say they are struggling to pay their mortgage, according to data from Finder’s Consumer Sentiment Tracker.
While the RBA acts independently of government, the inflation data would be welcomed by Anthony Albanese, who is behind in the polls with an election looming and in need of any economic outcomes that lower the cost of living.
Less impressed by an interest rate cut are those relying on savings income and importers and travellers who will now contend with an even lower Australian dollar. Immediately after the inflation announcement, the dollar fell somewhat against the US dollar, but more sharply against European and Asian currencies.
While 49 per cent of borrowers say they are well placed to manage interest rates at their existing level, a worrying 3 per cent – equivalent to 99,000 mortgagors – would be forced to sell if rates don’t start dropping.
The Finder data also revealed 40 per cent – equivalent to 1.3 million mortgage holders – would have to cut back spending to afford their mortgage over the coming four months.
We’ve been able to preserve the gains we’ve made in our labour market at the same time as we’ve got inflation down.
– Jim Chalmers, Federal Treasurer
Australian Treasurer Jim Chalmers said the worst of inflation was over.
“On every measure, we’ve made substantial and sustained progress in the fight against inflation,” he said.
“It’s not mission accomplished, but it means we’ve made much more progress,” he said.
“Inflation was higher and rising under the Liberals, but it’s lower and falling under Labor.
“Inflation is now almost a third of the 6.1 per cent we inherited when we came to office.”
He said inflation was moderating faster than what Treasury had forecast in its December budget update and proved Australia was on track for a “soft landing”.
“Many countries around the world have paid for progress on inflation through higher unemployment or lower economic growth, but we’ve been able to preserve the gains we’ve made in our labour market at the same time as we’ve got inflation down,” Mr Chalmers said.
The Australian Council of Social Service (ACOSS) CEO, Dr Cassandra Goldie, said the latest quarterly inflation figures must prompt the RBA to cut interest rates to ease growing financial distress and keep people in jobs.
“Raising the cash rate has dramatically increased financial stress among people on low and modest incomes and it’s time to finally give people some desperately needed relief.
“In recent years incomes have fallen, economic growth has stagnated and almost all jobs growth has been in government funded services.
“Failing to lower interest rates will only cause more economic damage and needlessly threaten thousands of jobs.
“Low unemployment is an opportunity, not a problem as some economic commentators suggest, and there is no sign that reducing unemployment further would risk a fresh outbreak of inflation.
“Easing financial stress for people and restoring jobs growth beyond publicly funded jobs should now be the RBA’s main concerns.”
An owner-occupier with a $600,000 debt and 25 years remaining on their loan could see their monthly repayments drop by $92 on the back of just one 0.25 percentage point RBA cut, assuming the banks pass it on in full to existing variable rate borrowers.
Housing costs falling
Annually, the CPI was at 2.4 per cent, down from 2.8 per cent last quarter, with the main contributors to the slowing of annual inflation being large falls in Electricity (-25.2 per cent) and Automotive fuel (-7.9 per cent) with easing inflation for New dwelling prices (+2.9 per cent).
The main contributors to the quarterly rise of 0.2 per cent were Recreation and culture (+1.5 per cent) and Alcohol and tobacco (+2.4 per cent). These rises were largely offset by falls in Housing (-0.7 per cent) and Transport (-0.7 per cent).
Shane Garrett, Chief Economist, Master Builders Australia, said a period of declining interest rates would be very beneficial for the economy and help lift new home building activity.
“The gross mismatch between supply and demand for rental accommodation is continuing to force rents higher.
“Encouragingly, the cost of owner occupier home purchases dipped slightly during the December 2024 quarter.
“However, the cost of a new home is still 39.5 per cent higher than it was five years ago.” Mr Garrett said.
The quarterly growth in Recreation and culture was driven by Domestic holiday travel and accommodation (+5.7 per cent). Higher prices for airfares and accommodation coincided with higher travel demand during the school holidays, the ABS reported.
The rise in Alcohol and tobacco prices was mostly driven by Tobacco (+5.8 per cent) reflecting the 5.0 per cent annual tobacco excise increase and biannual Average Weekly Ordinary Time Earnings based indexation that applied from 1 September 2024.
“The 2024-25 Commonwealth Energy Bill Relief Fund rebates led to a large fall in electricity prices this quarter,” Ms Marquardt said.
“Electricity prices fell by 9.9 per cent in the December 2024 quarter, following a fall of 17.3 per cent in the September 2024 quarter.
“Without the rebates, electricity prices would have risen 0.2 per cent this quarter.”
New dwelling prices also dropped this quarter (-0.2 per cent) which was the first quarterly fall since the June 2021 quarter. Price growth for new dwellings has slowed in recent months, as project home builders offered incentives and promotional offers to attract new buyers due to weak demand.
Automotive fuel prices fell 2.0 per cent this quarter, following a 6.7 per cent drop in the September 2024 quarter, reflecting lower global oil prices.
