A cooler-than-expected Australian CPI report for Q4 has firmed pricing for an RBA rate cut in February to a greater than 90% probability, with almost 100bps of easing being discounted through the cycle. After essentially stalling over the first half of 2024, the disinflationary process in Australia was revived by government rebates in Q3. That momentum has subsequently continued into year-end, if anything broadening to other areas of the CPI basket - including services. Annual inflation is now at 3-year lows at 2.4% headline and 3.2% on trimmed mean (or core) terms and is below the RBA's most recent set of forecasts (2.6% headline and 3.4% core).
Headline inflation in the December quarter came in at 0.2%, below expectations for a 0.3% outcome but in line with its pace from Q3. Annual inflation slowed from 2.8% to 2.4% (vs 2.5% expected), a low since Q1 2021. Core or trimmed mean inflation printed its softest quarter-on-quarter rise in 2½ years at 0.5%, surprising to the downside of the 0.6% expected figure. This eased the year-on-year pace to its slowest since Q4 2021 at 3.2% (vs 3.3%), down from 3.5%.
The situation should not be overcomplicated. The RBA raised the cash rate to 4.35% in response to inflation which peaked around 7-8% - that level of restriction is no longer required when inflation is now in and around the 2-3% target band. This is further highlighted with the 6-month annualised run rates slowing to 0.9% on headline CPI and 2.7% trimmed mean. Although the labour market remains strong, continuing to leave rates at their current level would put full employment - the other side of the RBA's mandate - at an increasing risk. The RBA must set monetary policy to balance the risks to both objectives.
A slowing in non-tradables or domestically-driven inflation from 4.1% to 3.1%Y/Y - its softest pace back to Q4 2021 - as well an easing in price pressures in the key services basket from 4.6% to 4.3%Y/Y should give the RBA enough comfort to start easing on signs of a broadening in the disinflationary process beyond government subsidies. Goods inflation, meanwhile, declined to 0.8%Y/Y - now significantly more aligned with global trends - to its weakest in more than 8 years.
The effects of government subsidies continued to push down on inflation strongly in Q4. That said, temporary effects - including the annual increase in tobacco excise and holiday travel in the peak summer period - added nearly 0.5ppt to quarterly inflation.
Electricity prices nationally were down 9.9% on the quarter (following a 17.9% fall in Q3), with households benefitting from the second $75 installment from the Commonwealth government's rebate (households in some states received two installments in Q4). Commonwealth and state government electricity rebates directly cut more than 0.8ppt from headline inflation over the back half of 2024. Rent inflation moderated to a 0.6% increase in Q4 - its slowest clip since Q1 2022 - reflecting increases to the Commonwealth Rental Assistance scheme. Meanwhile, public transport fares fell a further 3.2% across the quarter (-2.1% in Q3) on subsidies in several capital cities.
Away from the effects of subsidies, fuel prices continued to pull down on inflation with prices at the pump down 2% in Q4 after a 6.7% decline in Q3. Over the period, lower fuel prices have reduced headline inflation by more than 0.4ppt.
Another key area that pushed down on inflation in Q4 was a 0.2% decline in new dwellings (or home building costs). This was the first decline in that series since the first half of 2021, with the ABS attributing this to home builders increasing incentives and other promotions to drive activity that has been subdued by higher interest rates.
