Australia's Q4 CPI inflation report (due 11:30 AEDT) is finally upon us. The countdown to today's report has been on ever since the RBA abandoned its hawkish bias at its meeting on December 10, opening the door to easing monetary policy. Market conviction is high on a February rate cut, but good inflation outcomes are needed today as the labour market continues to remain very strong. Government subsidies to assist with the cost of living brought headline inflation back inside the RBA's 2-3% target band in Q3 for the first time since 2020, measures that underpin expectations for a further slowing from 2.8% to 2.6% year-on-year in Q4. The sticking point could be if core inflation, expected to print at 3.3%Y/Y, and prices in the services basket (4.6%Y/Y) fail to provide the RBA with sufficient signs of progress.
December quarter preview: Government subsidies to hold CPI down further
The effects of cost-of-living measures subsidising electricity bills, rents and public transport fares are set to weigh further on inflation in the December quarter. Markets look for headline CPI to print at 0.4% quarter-on-quarter (range: 0-0.6%) and 2.6% year-on-year, down from 2.8% currently. Meanwhile, on a trimmed mean or core basis a 0.6%q/q outcome is expected (range: 0.4-0.8%), which (without revisions to prior quarters) would lower the annual pace from 3.5% to 3.3%. As it stands currently, the RBA's forecasts are for 2.6%Y/Y headline CPI and 3.4%Y/Y on the trimmed mean.
As was the case in Q3, the key price movement will again be in electricity prices. Last quarter, federal and state government rebates saw electricity prices fall by 17.6%. These schemes should drive a further decline in Q4 - albeit with significant uncertainty around the magnitude. In the monthly CPI series, electricity prices fell by 12.3% in October; however, differences in the timing of when the various rebates have been applied led to a 22.4% rise in the ABS's calculation of prices in November. Households in Western Australia in December received rebates from both the federal and state government schemes, and this is expected to drive an overall decline in prices nationally in the final month of 2024.
The monthly CPI series indicated that government subsidies continued to lower rents and public transport fares in Q4. An increase to the Commonwealth Rent Assistance (CRA) scheme drove a 0.3% fall in rents in October before lifting by 0.6% in November. Although (as with electricity prices) there is uncertainty around the overall effect of the subsidy on rents (and therefore CPI) across the quarter, expect a further slowing following the moderation seen in Q3 to 1.6%q/q. Meanwhile, the public transport subsidies in Brisbane, Hobart and Darwin that drove a 2.1% fall in fares in Q3 still looking to be working their way through - the monthly CPI reported price declines of 0.2% in October and 0.1% in November.
Aside from these areas in which subsidies have been in effect, new dwelling costs will be key. Inflation in new home building costs was strong through the first 3 quarters of 2024 at a run rate of 1-1.1%, but the monthly data showed a fall of 0.6% in November that the ABS noted was due to builders offering discounts and other incentives. If that continues into December, quarterly inflation for new dwellings could slow notably, which would weigh on both headline and core CPI.
A recap: Inflation slows in Q3 on electricity rebates and lower fuel prices
Headline CPI returned inside the RBA's target band for the first time since the outset of the pandemic in the September quarter, but underlying inflation remained elevated to the target. Electricity rebates and declines in petrol prices saw headline CPI drop from 1.0% in Q2 to 0.2% in Q3 - its slowest quarterly rise since Q2 2020 - driving the annual rate down from 3.8% to 2.8%, a low since Q1 2021 and substantially below its peak of 7.8% in late 2022.
Much like overseas, the disinflationary impulse in Australia has been driven by the fading of earlier price spikes in energy, food and other goods. After largely stalling over the first half of 2024, disinflationary progress was revived in Q3 as federal and state government rebate schemes saw household electricity prices plunge (-17.3%q/q), and weaker global oil prices flowed through to the petrol pump in Australia (-6.7%q/q). On the back of this, goods inflation fell 0.6% in the quarter, slowing from 3.2% to 1.4% in annual terms.
Removing the effects of volatile price movements, trimmed mean CPI was 0.8% in Q3 - a run rate inconsistent with 2-3% inflation over the near term; however, the annual pace still fell from 4.0% to 3.5% (slowest since Q4 2021) on base effects. The more elevated pace of core inflation highlights that price pressures remained in key areas of the basket.
In contrast to goods inflation, services inflation firmed slightly in Q3 to a 1.1%q/q and 4.6%Y/Y pace, underpinned by household services, rents and insurance. The pass-through of higher input costs faced by firms to consumers as well as upward pressure on wages in a strong labour market have driven inflation in household services. Very low vacancy rates in the capital cities were placing upward pressure on rents, though (as outlined above) the CRA scheme led to lower rent inflation in Q3 (1.6%q/q).
