Australia's headline inflation rate remained at 3.4% on a 12-month basis in January, in line with late 2021 lows and defying expectations for a rise to 3.5%. After peaking in late 2022 at 8.4%, inflation slowed sharply over 2023 and today's result holds onto this progress. The recent momentum in the CPI points to further declines in inflation over the first half of 2024, amid the backdrop of a slowing economy and an easing labour market. This will only encourage markets to keep RBA rate cuts priced into the profile for the back half of the year.
January's report was broadly encouraging indicating that the disinflationary process has at least remained intact through the early part of 2024. There are, however, a couple of caveats hanging over this assessment: firstly, the January series updates only around 62% of prices, including only a small number of updates for services prices, the RBA's main area of focus, and secondly, the ABS has incorporated its annual reweightings into the January CPI. All this means the RBA will look for more data to be assured that inflation remains on track to come back to target. But there are already encouraging signs that this is likely to be the case, with headline inflation running within the upper half of the target band in both 3-month (2.7%) and 6-month (3.0%) annualised terms.
The various measures of underlying inflation in the monthly series softened in January, but as above, the RBA will view this with caution, awaiting more details on services prices. In January, trimmed mean CPI was 3.8% (from 4%) and CPI ex-volatile items and holiday travel (seasonally adjusted) was 4% (from 4.2%).
Turning to the categories, the main change in annual inflation came in household gas falling from 8.5% in December to -1.4% in January, driven by a large price rise (8.1% in January 2023) falling out of the annual calculation. Meanwhile, the effect of government rebates has held electricity prices to a 0.8%yr rise - the ABS reports the measures have kept what would have otherwise been a 15.3%yr rise at bay. Meanwhile, fuel prices eased from 5.3% to 3.1%yr on the back of a 0.9% month-on-month fall January.
Pushing in the other direction, food inflation increased from 4% to 4.4%yr, but this is still well down from the highs of 9-10% in late 2022. There was a rise in the clothing and footwear category from -0.8% to 0.4%yr, likely associated with the end of Black Friday and Boxing Day sales.
