Australian inflation failed to soften as markets expected, remaining above the RBA's target range (2-3%) early in the new year. Headline inflation (0.4% month-on-month) was unchanged at 3.8% for the 12 months through January, defying forecasts to ease to 3.7%. Meanwhile, core or trimmed mean inflation (0.3%m/m) lifted slightly from 3.3% to 3.4%yr. Markets are currently pricing in only a small chance (around 15%) of an RBA rate hike at its next meeting in March. Instead, the May meeting is seen as much more likely (around 90%) for the next cash rate increase to be delivered, once the key quarterly inflation figures are released in April.
Headline inflation was 0.4% in the month of January, with a range of seasonal effects seeing it cool from a 1% pace in December. However, markets expected inflation to slow more sharply. As a result, annual inflation at 3.8% surprised slightly to the upside of expectations (3.7%). Core inflation was a little firmer in January (0.3%) than it was in December (0.2%), seeing the annual rate rise from 3.3% to 3.4% - also above expectations (3.3%).
Late in 2024, headline inflation was 2.4%, around the midpoint of the RBA's target for 2-3% and core inflation (3.3%) was just above the top of the band. Over the past year or so, a range of factors have seen inflation rise again. These include electricity prices (32.2%yr) as government rebates have ended, while the cost of building new homes and a tight rental market has driven higher housing inflation (6.8%yr). Meanwhile, the RBA has been pushing the narrative that inflation has picked up because the economy and labour market have been a bit stronger than it expected through last year.
Under the hood, there was a notable uptick in goods inflation to 1.3% month-on-month in January. At an annual rate, goods inflation rose from 3.4% to 3.8% - significantly higher than at the end of 2024 (0.8%), with electricity prices (as discussed) the driving factor. Services inflation fell in January (-0.7%), largely the result of seasonality in domestic holiday travel, easing the annual pace from 4.1% to 3.9%, a bit softer than 12 months ago (4.3%). But services inflation is still elevated and causing the RBA concern. Rents (3.9%) and medical services (4.2%) have been key pressure points through the past year.
