Australia inflation: CPI falls to 4.1pc in December quarter, RBA to ...

Westpac chief economist and former RBA assistant governor Luci Ellis said the RBA was “unlikely to raise rates further this cycle”.

“Some of the upside risks the board minutes had been calling out in recent months have not come to pass,” she said.

“We continue to expect the first rate cut no earlier than September.”

Oxford Economics economist Sean Langcake said the inflation data were well below expectations and disinflation was ahead of the schedule laid out in the RBA’s November forecasts.

“We expect we have reached the peak of the rate hike cycle and rates will be kept on hold at the RBA’s February meeting,” he said.

“But with cost-of-living measures due to roll off and underlying inflation still above target, we do not expect to see rate cuts until late 2024.”

It is the lowest annual headline inflation print since the December quarter 2021, when the CPI rose 3.5 per cent.

Automotive fuel prices fell 0.2 per cent in the December quarter, when average unleaded petrol prices were volatile and ranged from a high of $2.13 per litre in early October, to a low of $1.78 per litre in mid-December.

Inflation for both goods and services eased late last year.

The RBA has been worried about persistent inflation in labour-intensive services sectors, such as dentists, pet services, restaurants, mechanics and hairdressers.

Services inflation cooled to 4.6 per cent, down from 5.8 per cent in the September quarter.

However, domestic-generated inflation remained firm due to strong price rises for new dwellings (5.1 per cent), rents (7.3 per cent after extra rent assistance), insurance (16.2 per cent) and electricity (6.9 per cent after bill subsidies).

The inflation for so-called non-tradable goods and services, which are mostly influenced by domestic factors, rose 5.4 per cent, down from 6.2 per cent.

ANZ economist Catherine Birch said non-tradables inflation was “still very strong” and could make the RBA retain its “hawkish” tone on monetary policy at its meeting next week.

Inflation for tradables was significantly lower at 1.5 per cent, due to easing prices for imported goods such as clothing, footwear, furniture and household appliances.

RBA governor Michele Bullock warned in November that Australia’s inflation challenge had become “home grown”.

The RBA increased the cash rate by 0.25 of a percentage point to 4.35 per cent in November, following a hotter than expected September quarter inflation print of 5.4 per cent.

The RBA board, which will meet next Monday and Tuesday, targets an inflation rate of between 2 per cent and 3 per cent.

Australian Bureau of Statistics head of prices Michelle Marquardt said: “While prices continued to rise for most goods and services, annual CPI inflation has fallen from a peak of 7.8 per cent in December 2022, to 4.1 per cent in December 2023.”

The RBA’s November forecasts had anticipated annual headline and underlying inflation of 4.5 per cent.

Market economists had forecast an average rise in quarterly inflation of 0.9 per cent and a 4.3 per cent in annual terms for the December quarter.

The latest inflation figures come amid other signs the economy was cooling late last year.

A volatile labour market shed 65,000 jobs in December from previous record levels and the unemployment rate held steady at a historically low 3.9 per cent.

Retail sales plunged 2.7 per cent last month, the biggest monthly decline since pandemic lockdowns in mid-2020 and, before that, the introduction of the goods and services tax in July 2000.

The softer retail sales and jobs market in December were partly attributed to an unwinding of robust activity in November when the Black Friday and Cyber Monday sales helped bring forward spending.

Deloitte Access Economics partner Stephen Smith said the Australian economy was slowing and that inflation is on the path toward the RBA’s target band.

“The fight against inflation is not yet over, and the rest of that path is unlikely to be smooth,” he said.

“Tensions in the Middle East, Australia’s housing crisis and a disorderly energy transition all threaten to cause fits and spurts of inflation over the next 12 months.”

“The RBA’s hawkishness means it will not be in a hurry to cut interest rates.

“Deloitte Access Economics’ expectation is still that the next move in interest rates will be a cut in September 2024.”

Treasurer Jim Chalmers welcomed the “encouraging” progress on inflation, but said it was not “mission accomplished”.

“What we’re seeing here is inflation is slowing, real wages growing for two consecutive quarters and from the first of July you will see tax cuts flowing,” Dr Chalmers said.

EY chief economist Cherelle Murphy said mortgage holders could “breathe a sigh of relief” before the RBA board meeting next Tuesday after 13 interest rate rises since May 2022.

“With attention now turning to rate cuts, mortgage holders will need to remain patient,” she said.

“Cuts this year could be premature as risks persist into 2024.

“Domestic sources of inflationary pressures are still present – including continued strong demand for housing, rising insurance premiums and a tight labour market.”

“International sources, including conflict in the Middle East and global shipping issues, could also be a source of upward pressure on energy and transport prices as the year rolls on.”

National Australia Bank’s closely watched business survey last week showed price and labour cost growth declined sharply in December.

The US Federal Reserve’s preferred gauge of underlying inflation cooled to an almost three-year low of 2.9 per cent in December from a year earlier, figures on Friday showed.