The ABS Consumer Price Index (CPI) released Wednesday revealed a lift of 0.6% in the December quarter and 4.1% annually. 

The quarterly increase was softer than the 1.2% rise in the September quarter and the slowest since March 2021. 

Annually, the latest figure was below RBA’s forecast of 4.5% and much lower than the CPI data in the same period in 2022. 

“While prices continued to rise for most goods and services, annual CPI inflation has fallen from a peak of 7.8% in December 2022,” ABS head of labour statistics Michelle Marquardt said. 

Excluding volatile items, annual trimmed mean inflation was 4.2%, down from 5.1% in the September quarter, placing it well above the Reserve Bank’s 2-3% target band.

Both quarterly and annual figures were lower than the forecast of all four major banks. 

Economists from CBA and NAB were expecting the annual inflation rate to hit 4.2%, while ANZ and Westpac both placed it at 4.3%. 

Leading the pack of price increases in the December quarter were housing (up 1.0%), alcohol and tobacco (up 2.8%), insurance and financial services (up 1.7%), and food and non-alcoholic beverages (up 0.5%).

On an annual basis housing (up 6.1%), food and non-alcoholic beverages (up 4.5%), and alcohol and tobacco (up 6.6%) contributed the most. 

According to ABS, new owner-occupier dwellings, rents, and utilities drove the prices of housing in the quarter.

“Higher labour and material costs contributed to price rises this quarter for construction of new dwellings. The 1.5% increase is slightly higher than the 1.3% rise in September 2023 quarter,” Ms Marquardt said.

Changes to the Commonwealth Rent Assistance, which increased support for renters receiving payments, moderated the quarterly increase in rental prices which stood at 0.9%, slower compared with the 2.2% rise in the September quarter. 

Meanwhile, price falls for meat and seafood and fruit and vegetables partially offset the increases in food-related categories. 

Higher premiums across motor vehicles, house, and home contents drove the price movement in insurance.

The lift in tobacco prices, on the other hand, was attributed to the 5% annual tobacco excise indexation and the biannual Average Weekly Ordinary Time Earnings increase. 

All eyes on RBA’s February meeting 

As the inflation continues to track down towards the Reserve Bank’s target band and below its annual forecast, the probability of a rate hold becomes more likely. 

The December quarter CPI is the final crucial dataset to guide the central bank board’s monetary policy decision when they meet next week. 

Today’s below-market-forecast read deepens the expectations the RBA will keep the cash rate at 4.35%. 

“A result in line with our forecasts should be enough to stay the RBA’s hand at its 5-6 February meeting,” ANZ’s research team said.

“However, we expect strong prints from non-tradables and services inflation in Q4, which will likely maintain its tightening bias and hawkish tone in the statement.”

NAB, which previously predicted a February rate hike, said anything below the central bank’s 4.5% forecast “will keep the RBA on hold” next month. 

“But we think the soft tightening bias will remain given too high service inflation. Helping to moderate inflation in Q4 is modest goods deflation and a rental subsidy impact,” NAB head of markets economics Tapas Strickland said. 

Westpac, in line with its peers, earlier said a weaker print (0.7%) would “remove the residual chance of further rate hike”. 

When will the easing cycle begin?

Experts believe the RBA will delay the easing cycle until the second half of 2024. 

Westpac pencils in September for the first cash rate cuts, with 1.5 rate cuts factored in by year-end. 

ANZ and NAB predict a much later start to the easing cycle, as both institutions expect the interest rate to hold steady until November.

Being a pivotal component in monetary policy decisions, the easing trend in inflation paves the way for the RBA to drop interest rates from its current peak.  

“We think the disinflationary trend will continue throughout 2024 and into 2025. Our models for aggregate inflation see a rapid decline occurring over 2024,” CBA economist Stephen Wu said. 

Though NAB expects an uptick in first-quarter 2024 CPI from the impact of rent subsidies dropping out, the big bank also sees “the easing trend in inflation remains clear”.

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