Australia’s underlying inflation rate has fallen to a three-year low of 3.2%, bolstering the case for a rate cut next month that would provide a dopamine hit to the government ahead of a cost-of-living election.
The Reserve Bank of Australia’s preferred inflation gauge, which strips out volatile price swings, fell to an annual 3.2% for the December quarter, down from 3.5%.
Economists had forecast that a 3.2% reading would be enough to trigger a rate cut next month, offering relief to mortgage holders and representing a vote of confidence that high inflation levels were being reined in.
The headline consumer price index, which includes government-rebated electricity bills, came in at an annual 2.4%, down from 2.8% at its last quarterly reading.
The Australian Bureau of Statistics credited the drop in headline inflation to lower electricity prices, falling fuel prices and moderating price rises for new dwellings. The fall in electricity prices has been aided by government relief measures.
The treasurer, Jim Chalmers, said on Wednesday the government had been able to “get on top of this inflation challenge”.
“We don’t pretend that it’s mission accomplished on inflation, but we are making very substantial progress,” Chalmers said.
“The soft landing that we have been planning for and preparing for is now looking more and more likely.” A “soft landing” refers to a policy objective of reducing inflation without sparking a major shock to the economy such as a recession.
Chalmers said he would refrain from offering the RBA “free advice” on whether it should cut rates next month.
The chief economist at Betashares, David Bassanese, responded to the CPI data by saying, “cut baby cut”, after correctly forecasting the inflation figures.
“As a result – and despite still solid employment growth – there’s no question the economy deserves an interest rate cut to ease the restrictiveness of current policy settings,” he said.
Saxo Bank’s Asia Pacific senior sales trader Junvum Kim said: “This softer-than-expected inflation data could amplify expectations for a February RBA rate cut and bolster the Reserve Bank’s confidence in steering inflation back to its target within a reasonable timeframe.”
The official cash rate has sat at an elevated 4.35% since November 2023, while the last rate cut occurred in November 2020 as part of a policy to stimulate a pandemic-stricken economy.
While the inflation rate has not fallen as fast as central bankers had hoped, it has trended lower since its 2022 peak of 7.8%, when consumers grappled with runaway prices for essential goods.
Lower rates of inflation should convince the RBA to start relaxing its squeeze on the economy to avoid hurting the job market and triggering a recession.
Those not predicting a rate cut point to the recent jobs figures, which painted a picture of a resilient jobs market that might not need stimulus through lower borrowing rates.
Polling is tight before Australia’s election, due by May, with unofficial campaigning under way. While most incumbent governments that faced voters last year lost power, those that won revealed aggressive policies designed to alleviate cost-of-living pressures.
The market was pricing in an 84% chance of a 25 basis-point rate cut next month ahead of Wednesday’s data release.
The Australian dollar dropped in response to the inflation data, as currency traders start to price in an interest rate cut next month.
The local currency fell from just over 62.5 US cents to 62.3 US cents. The Australian dollar typically falls when rates are lowered, and rises when they increase.
The fall is modest given there were widespread expectations in the market of an incoming interest rate cut before the inflation data was released.
