Australian inflation declined more sharply than expected into the end of 2023, opening the door to earlier RBA rate cuts. Headline inflation fell to 4.1% year-on-year - roughly half what it was at its peak in late 2022 (7.8%) - with core inflation at 4.2% now also well down from its highs near 7%. Global disinflationary impulses continue to flow through to Australia, while domestically-generated inflationary pressures have eased somewhat.
Consumer Price Index — Q4 | By the numbers 
- Headline CPI slowed to 0.6% in the December quarter, below expectations for 0.8% and down from 1.2% in the previous quarter. In annual terms, headline inflation fell from 5.4% to 4.1% (vs 4.3% consensus).
- Underlying CPI averaged 0.8% in the quarter from 1.2% in Q3, coming in from 5.3% to 4.2% at an annual rate.
- The key trimmed mean measure was 0.8%q/q (vs 0.9% exp) - down from 1.2%q/q in Q3 - with the annual pace falling to 4.2% from 5.1%.
Consumer Price Index — Q4 | The details
Australia's key inflation outcomes came in below market estimates in the December quarter, bringing forward expectations for RBA easing. The report aligned with my expectations for below-consensus outcomes, as discussed in my preview note. Disinflation accelerated into year-end overseas, and this was also the case in Australia. Headline inflation declined sharply from 1.2% in Q3 to 0.6% in Q4, resulting in the annual pace falling from 5.4% to 4.1%, a 2-year low. Meanwhile, the core (or trimmed mean) rate softened from 1.2% in the prior quarter to 0.8% in Q4, bringing the annual pace down to 4.2% - a low to Q1 2022 - from 5.1% previously.
Key developments in the quarter included tradables prices falling 0.7% (1.5%Y/Y), with Australia playing catch-up to disinflationary impulses offshore. By contrast, non-tradables - inflation generated domestically - remains more elevated up another 1.3%q/q, though the annual pace (5.4%) has moved well past the peak, helped by services prices (4.6%) cooling to a low since Q3 2022.
Several factors were behind the slowing in the quarterly inflation rate. Discounting through the Black Friday sales saw broad-based falls in durable goods prices, including furniture and furnishings (-3.5%), household appliances (-3%) and recreational goods (-2.4%). Clothing and footwear prices were limited to a 0.5%q/q rise, as Black Friday sales moderated the effect of higher prices for in-demand summer stock.
Fuel prices surprised falling by just 0.2%q/q - the monthly CPI series had pointed to a much larger fall - but this was still a key driver of lower inflation, accounting for 0.35ppt of the decline in the quarterly CPI rate from Q3.
Government measures providing cost-of-living relief saw significant reductions in inflation for rents (0.9% from 2.2%) and utilities (0.6% from 3.6%), the latter driven by rebates on electricity bills (still up 6.9%Y/Y).
In other welcome news for households, prices fell in key items of the grocery basket. This was seen in declines for fruit and vegetables (-1.2%) and meat and seafood (-1.2%). Meanwhile, pharmaceuticals fell (-1.7%) through PBS subsidies.
Despite inflation easing in Q4, cost-of-living pressures were still rising in some areas. Pushing up on inflation in the quarter were things such as insurance (3.8%q/q, 16.2%Y/Y) and household services, including child care (3.2%), hairdressing (1.7%), and vehicle (1.4%) and home maintenance services (1.1%).
Consumer Price Index — Q4 | Insights
Australia's inflationary impulse cooled materially over 2023, accelerating in the final quarter. At 4.1% in headline terms and 4.2% on a core basis, these outcomes are below the 4.5% pace forecast by the RBA. The RBA will update its forecasts for the February meeting (5-6), which will likely now see its inflation outlook revised lower. Following today's report, markets see the RBA starting to cut rates in Q2 from Q3 previously.
