Slightly below expectations December 2024 quarter CPI data released today were warmly received by stock market investors. The stats, which have ramifications for Australia’s monetary policy settings, bolstered hopes that the Reserve Bank of Australia (RBA) will reduce its benchmark interest rate ahead of the next Federal election, which must be held by May 2025.
The odds on a lowering in the RBA’s benchmark rate, currently at 4.35%, at its next meeting on 18 February 2025 has definitely shortened, but it is still no certainty.
Why?
For one thing, key underlying CPI measures are still not quite within the RBA’s target range. For another, the RBA’s decision-making process is not solely determined by historical shifts in Australia’s main inflation indicator. It is also heavily influenced by inflation expectations, which is in turn impacted by a host of economic factors and variables, including the strength of our jobs market and the pace of spending by all levels of Australian government.
The headline CPI rose by 0.2% in the December 2024 quarter, a touch under market expectations of a 0.3% gain. This delivered an annual increase to 2.4%, which was below the 2.8% figure reported in the September 2024 quarter. The biggest quarterly gainers amongst the headline CPI’s components were Recreation and culture (+1.5%) and Alcohol and tobacco (+2.4%). On the flip side of the coin, a lid was kept on the latest headline CPI by falls in Housing (-0.7%) and Transport (-0.7%).
But what got the markets really excited was the reduced readings in the closely watched Trimmed Mean and Weighted Median underlying inflation measures included in the ABS CPI report. These are the inflation barometers given most attention by the RBA as it strives to deliver on its inflation charter, which is to keep annual underlying consumer price inflation between 2-3%.
The Trimmed Mean CPI was 0.5% in the December 2024 quarter, slightly below economists’ consensus forecast of 0.6%. The annual print of 3.2% was materially below the 3.6% number reported in the September quarter. Still not quite within the RBA’s target range, but definitely headed in the right direction for those pining for lower interest rates (holders of variable mortgages included).
An interesting new addition to the latest set of quarterly CPI stats was the inclusion of the items ‘trimmed’ out of the ABS’ Trimmed Mean CPI measure in the December 2024 quarter. The biggest decliner taken out was Electricity, which has declined appreciably of late thanks to Federal government Energy Bill Relief Fund rebates and State government rebates applied from July 2024 – these government initiatives effectively cut electricity costs for households in both the September and December 2024 quarters. The biggest gainer excluded from the December 2024 Trimmed Mean inflation measure was Eggs, a foodstuff currently experiencing significant supply shortages.
The good rally seen in Australian stock markets post the lower than expected December quarter CPI data was inevitable but does come with a potential sting in the tail for inflation – the improved CPI stats also generated some A$ selling, which, all other things being equal, adds to the price of imported goods.
But for now, a coop of interest doves (as well as a flock a government ministers!) are hoping the RBA is now much closer to an interest rate cut at its next meeting on 18 February, or failing that the following one on April Fools’ Day (how appropriate!)
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