In January, Australia saw a month-on-month dip in consumer prices, mainly due to a slowdown in housing costs paired with decreased holiday travel. This trend could provide comfort to policymakers, indicating that inflation might be on a stable course.
According to the Australian Bureau of Statistics, the consumer price index (CPI) dropped by 0.2% in January, following a 0.8% increase in December, while the annual rate remained steady at 2.5%, aligning with market expectations. The core inflation measure, known as the trimmed mean, showed a slight annual rise to 2.8% from December’s 2.7%.
Analysts have warned that the January report represents only a segment of the comprehensive CPI basket, with a predominant focus on goods rather than services.
Meanwhile, market swaps are indicating a mere 17% likelihood of the Reserve Bank of Australia (RBA) implementing another interest rate reduction in April, yet a rate cut for July is already fully anticipated.
As Abhijit Surya, an economist at Capital Economics, points out, the softer inflation figures could alleviate some of the RBA’s inflationary concerns, potentially allowing for further rate cuts.
Prices for new dwellings, encompassing new constructions and significant renovations, increased by 2.0% in January compared to the previous year, marking the slowest growth rate since mid-2021 and being well beneath the 22% peak observed in 2022.
Rent figures showed a 0.3% increase, with the annual rate down to 5.8% from its August 2023 peak of 7.8%. Additionally, holiday travel and accommodation expenses dropped by 6% during the same month.
The RBA had previously reduced interest rates by a quarter-point, its first such move in over four years, while cautioning that further easing is not certain. One challenge highlighted is the resilient labor market, which may push up costs and hinder efforts to bring core inflation within the target range.
Employment growth has been robust for the past year, keeping the unemployment rate close to 4.0%. Despite these labor market dynamics, inflation has cooled from a peak of 7.8% in late 2022 to 2.4% in the fourth quarter of 2024, alongside an annual decrease in wage growth by one percentage point over the past year.
Following these developments, Surya remarked that the latest data aligns with expectations that the RBA may gradually withdraw some monetary restrictions in the coming months.
