- Headline inflation rate rose 0.2% in Q4 2024, 2.4% over the year.
- Trimmed mean inflation was 0.5% for the quarter and 3.2% annually, undershooting RBA forecast.
- Price falls in electricity and petrol offset the price increases in other goods and services
- Major banks now expect the RBA to cut rates in February.
Fresh data from the Australian Bureau of Statistics (ABS) revealed headline inflation rose 0.2% in the final quarter of 2024, bringing the annualised figures to 2.4%.
The two consecutive 0.2% quarterly increases (September and December quarters) are the lowest since June 2020 when the consumer price index (CPI) fell during the Covid-19 outbreak.
Additionally, the 2.4% annualised inflation rate was down from 2.8% in the previous quarter.
While prices rose for some goods and services, they were offset by the large falls in electricity (down 25.2% due to government rebates) and automotive fuel (down 7.9%).
"Electricity prices fell by 9.9% in the December 2024 quarter," said Michelle Marquardt, ABS head of prices statistics.
"Without the rebates, electricity prices would have increased 0.7% this quarter," she added.
Petrol prices, on the other hand, sank 2% over the previous quarter, reflecting a decline in global oil prices.
These falls dragged annual goods inflation to 0.8%, down from 1.4% in the previous quarter.
Excluding these volatile items however, trimmed mean inflation was 0.5% through the December quarter and 3.2% annually.
Inflation undershoots expectations: What's next?
The December quarter figures are within market expectations, with economists in three of the Big 4 banks pencilling in a 3.2% annual rise in underlying inflation.
Westpac was the outlier, forecasting a faster 3.3% rise over the year.
More notably, however, December's trimmed mean inflation rate of 3.2% came in below the Reserve Bank of Australia's (RBA) forecast of 3.4% in its November Statement on Monetary Policy (SMP).
The latest CPI is deemed pivotal in determining whether the Reserve Bank moves ahead with an interest rate cut when the Board meets next month.
Following the Wednesday print, major bank economists are fully priced for the official cash rate to finally drop from its current peak of 4.35%.
"We believe today's data has given the green light for the RBA to commence normalising the cash rate at the February Board meeting with a 25 bp rate cut," said Gareth Aird, CBA head of Australian economics.
Despite the "bumpy" quarterly changes in underlying inflation, the chief economist of Australia's largest bank believes the path of returning to target band "has gathered steam".
"The RBA's forecast from the November SMP was for a Q4 2024 trimmed mean outcome of 0.7%/qtr - so this is a material undershoot in the quarter," Dr Aird said.
"The disinflation process is never a smooth one on a quarterly basis," he added.
CBA expects a February start to rate cuts, since revising it from its previous call of monetary easing kicking off in December 2024.
Big bank peer NAB, which anticipates rate cuts to commence in May, said the February meeting is live and that its RBA call is "under review".
"Our call has been that on balance the RBA would hold fire before cutting in May given there is little urgency to cut and there is option value in waiting to better assess the trajectory of the labour market and the extent of the pickup in growth, before delivering 75 bp of cuts this year," explained Taylor Nugent, NAB senior markets economist.
NAB believes the RBA having more robust data as a reference - four unemployment prints, Q4 GDP, Q4 WPI, February CPI indicator, and Q1 CPI - before its May board meeting would give it a clearer picture of whether inflation is moving sustainably back to target.
Westpac, which before ABS' Wednesday CPI release shared the same forecast for the start date of rate cuts with NAB, has changed tack, noting that a February cut is "on".
"The better-than-expected inflation data tilts the balance of probabilities back in February's favour," said Luci Ellis, Westpac Group chief economist.
"With trimmed mean inflation at 0.5% in the quarter (3.2%/yr), we have just enough evidence to conclude that disinflation has proceeded faster than the RBA expected, so the Board will have the required confidence to start the rate-cutting phase in February."
Housing-related inflation to give RBA more confidence to cut rates
More than the cost-of-living assistance measures slowing down inflation, economists said the easing of housing costs contributed more to the deceleration of domestic price pressures.
"Both rents and home-building costs have decelerated noticeably in recent months, and not just because of government cost-of-living support," Ms Ellis noted.
New dwelling prices dropped 0.2% in the December quarter, the first quarterly fall since the June 2021 quarter.
Price growth for new dwellings has also slowed in recent months, as project home builders offered incentives and promotional offers to attract new buyers due to weak demand.
In fact, more than the price falls in electricity and fuel, experts noted that housing accounted for "almost all of the improvement in the trimmed mean inflation in the quarter".
"Some of that is temporary, but the plateauing in house construction costs are an important and helpful shift in the CPI backdrop that support downward revisions to the RBA's near-term outlook," Mr Nugent said.
But the resilient labour market could stand in the way
The unemployment rate, another key data the RBA Board considers in its monetary policy decisions, is the fog that clouds this outlook.
The jobless rate in December lifted to 4%.
However, the additional 10,000 individuals looking for work in the period was more than offset by the 56,000 who landed jobs.
Other indicators such as job vacancies and business surveys also implied that the labour market has not eased to a level where there is urgency for the RBA to cut rates.
"The RBA already viewed the labour market as being tighter than full employment," Ms Ellis said.
Given that the unemployment rate in the December quarter was also below the RBA's forecast, experts believe the extent to which the Reserve Bank remains comfortable that inflation will stay near target "depends on the extent to which they re-assess the degree of spare capacity in the labour market".
"In the end though, the good news on inflation beats the stronger news on the labour market," Ms Ellis said.
"Recall that the RBA's November forecasts had trimmed mean inflation at 3.4% and an unemployment rate of 4.3% for the December quarter of 2024.
"The 0.2 ppt downside surprise on trimmed mean inflation outweighs the 0.3%pt surprise on the unemployment rate."
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