Inflation Falls—But Will the RBA Blink?

Today's figures from the Australian Bureau of Statistics (ABS) show a 0.2% increase in the headline Consumer Price Index (CPI) for the December 2024 quarter, resulting in a 2.4% annual rise. The more important trimmed mean measure, which smooths out price volatility driven by one-off factors, rose by 0.5% quarter-on-quarter and 3.2% year-on-year. 

The inflation print today has revealed interesting trends, with goods inflation at its lowest since 2016 (0.8%) and services inflation remaining elevated at 4.3%. Non-discretionary inflation fell to 1.8%, while discretionary inflation rose to 3.2%. The overall economic picture suggests a gradual stabilization of prices, with government interventions like energy rebates and rent assistance still playing some role however price pressures are undeniably coming off.

Monetary Policy Implications 

Will the Reserve Bank of Australia (RBA) blink? Only time will tell. Headline inflation has now reached the mid-point of the RBA’s target range, while the trimmed mean measure has undershot the central bank’s forecasts from the November Statement on Monetary Policy (SMP).

Today’s data has opened the door for a rate cut at the RBA’s first policy meeting of the year on February 18, with inflation clearly trending downward. While these figures are encouraging, there remains a slight chance the Board opts to hold once more, waiting for an additional data point as insurance before pivoting. That said, the February meeting is very much live, as calls for a cut grow louder.

Low unemployment continues to act as a buffer against a major downturn, while higher interest rates are steadily pulling prices lower. As inflation stabilises, household incomes are expected to improve—even if wage growth remains stable. Does this point to a risk of accelerated spending in the months ahead? Maybe, however, this is not a strong enough reason to keep rates on hold for too long.

While domestic conditions are aligning in favour of a cut, global uncertainties persist—particularly on the currency front—keeping policymakers on alert. That said, we do not expect external factors to weigh heavily on the Board’s decision, especially given that any easing cycle, when it begins, will be a shallow one.

In sum, while there is understandable enthusiasm for a potential policy pivot, the real need of the hour is to balance growth with the imperative to prevent inflationary pressures from reemerging.

CPI Movers and Shakers

In the December quarter, headline inflation rose by 0.2%, with an annual increase of 2.4%. The main contributors to this change were price rises in recreation and culture (up 1.5%) and alcohol and tobacco (up 2.4%), while housing and transport both saw price falls of 0.7%. Significant factors included a 5.8% reduction in childcare costs, which slightly lowered the overall CPI, and a 9.9% drop in electricity prices due to the Energy Bill Relief Fund rebates. Excluding major price falls in electricity and automotive fuel, the trimmed mean annual inflation was 3.2%, down from 3.6% in the previous quarter. 

By capital cities comparison, Hobart led the charge with the highest inflation increase at 1.5%. Perth and Brisbane followed with a 0.7% and 0.6% increase, respectively. Conversely, Sydney, Adelaide, and Darwin each experienced a 0.1% decline in inflation. Meanwhile, Melbourne and Canberra had modest increases of 0.1%.