Australian Inflation Update

Last update - 31 January 2024 By James Woods

Today’s release of the latest official inflation data for Q4 2023 has been well received by investors, adding to the case for an easing of policy in 2024.

The latest figures showed inflation moderated to the slowest pace in two years to 4.1% from a year earlier and below estimates of 4.3% Importantly, this figure is below the RBA’s own forecasts of 4.5% and we should begin to see less hawkish language from RBA policymakers and further indications of rate cuts in the coming months. Pending no significant surprises to the downside in terms of GDP or the labour market, all else equal, this should translate to lower bond yields and a weaker AUD, providing support for equities.

The consumer price index (CPI) rose just 0.6 per cent in the December quarter, representing the smallest quarterly rise since the March 2021 quarter. The RBA’s preferred measure of underlying inflation, the trimmed mean, which excludes temporary price changes, also showed a deceleration, rising 4.2 per cent annually, down from 5.1 per cent in the September quarter.

Headline Inflation (YoY & QoQ %)

Adding to the positive official quarterly figures, the latest monthly estimate of inflation for December rose 3.4% from a year earlier, down from 4.3% previously and also below expectations of 3.7%.

Monthly Inflation Estimate (YoY %)

This softer-than-expected inflation data has boosted speculation for rate cuts, with interest rate futures now pricing a full 0.25% rate cut as soon as August, brought forward from September prior to the meeting. This has translated into a weaker Australian Dollar which is -0.45% lower at 0.6572 while the ASX200 has reversed initial losses to trade 0.31% higher.

This inflation data comes amidst other signs of a cooling economy. The labour market shed 65,000 jobs in December, while the unemployment rate held steady at a historically low 3.9 per cent. Retail sales earlier this week were surprisingly weak, dropping -2.7% over the month vs estimates of a -1% drop, marking the biggest monthly decline since the pandemic lockdowns in mid-2020.

Combined, these factors point to a shift in the outlook for interest rates, adding to the case for the RBA to ease rates in 2024 to prevent any unnecessary damage to the economy as it seeks to engineer a “soft landing”.  The RBA is next due to meet on February 6th, which will also be accompanied by updated economic projections.

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