Update 31 January 2025

The recent report from the Australian Bureau of Statistics (ABS) has set the stage for a potential shift in the monetary policy landscape.

The good news is inflation finally seems to be coming down!

Inflation figures for the final quarter of 2024 have indicates a slowdown, analysts and financial markets seem to be increasingly optimistic that the Reserve Bank of Australia (RBA) will implement an interest rate cut in the near future. 

Let’s explore this a bit more in this article..

What’s Happened with Inflation?

Current Inflation Rates

The ABS reported that the annual inflation rate fell to 3.2% over the twelve months leading up to December 2024. This figure, along with a meager 0.2% increase in consumer prices for the December quarter, indicated a broader easing trend in inflation that many economists didn’t foresee.

Now for a financial “techie term” – the “trimmed mean”!

This trimmed mean is a critical measure of underlying inflation and happily it also declined to 0.5% for the quarter, significantly lower than the predicted 0.6%. This is a welcome change from the inflationary trends of the last year or two!

What’s the Economic Context Behind the Trends?

The Role of Energy Prices

One of the significant drivers behind the cooling inflation has been the decline in energy prices, buoyed by government subsidies. The recent 9.9% drop in electricity prices, following a remarkable 17% decrease in the previous quarter, has played an important role in shaping the broader inflation figures. 

No-one will be complaining about this statistic!

The ABS highlighted that without these subsidies, electricity costs could have risen by 0.2%. Lower energy costs both household budgets and also influence the pricing strategies of businesses across various sectors.

Housing Market Fluctuations

Interestingly, the housing market also contributed to the easing of inflation, with new dwelling prices experiencing their first quarterly fall since mid-2021. This decline results from project home builders introducing various incentives to entice buyers amid softening demand. 

Could this signal the end to the real estate boom triggered by COVID?

These dynamics within the housing sector have also contributed to reducing inflationary pressures and reflect the changing economic circumstances that policymakers must now consider.

The Road Ahead: Interest Rate Cut Expectations

Market Predictions

Most Australians will be glad to hear that financial markets are projecting an over 90% probability of an interest rate cut when the RBA convenes on February 18, 2025. 

Analysts, including those from Capital Economics, have adjusted their forecasts in light of these inflation figures, now anticipating that underlying inflation could reach the RBA’s target band of 2-3% by June rather than the previously expected December timeline. This seems to present a compelling argument for the RBA to reconsider its current interest rate stance.

Why Cuts are Needed

Relief for Households and Borrowers

Economist David Bassanese aptly titled his recent commentary “Cut baby cut!” highlighting the growing call for the RBA to respond to the lowering inflation metrics. He posited that despite a robust employment growth scenario, the economy could greatly benefit from an interest rate reduction. The rationale is straightforward: easing the current restrictive monetary policy situation could provide much-needed relief to households and mortgage holders grappling with rising living costs.

Broader Economic Implications

A Balancing Act for the RBA

In a delicate balancing act, the RBA must weigh the recent inflation improvements against ongoing pressures, particularly in the services sector, which continues to experience elevated costs. Shadow Treasurer Angus Taylor highlighted that services inflation remains persistently high, partly a reflection of the cost-of-living challenges faced by Australians.

As Treasurer Jim Chalmers noted, while progress against inflation is apparent, it is not yet “mission accomplished.” The RBA’s commitment to achieving sustainable inflation levels must be kept in focus as it considers its impending decisions. The trajectory of interest rates not only impacts economic growth but also shapes consumer confidence and spending habits.

In a recent ABC News piece, the business reporter Stephanie Chalmers (source: https://www.abc.net.au/news/stephanie-chalmers/9333662)  stated:

“The Reserve Bank has emphasised that “sustainably” returning inflation to its target within a “reasonable” time frame is its top priority.

The central bank next meets in mid-February and will deliver its interest rates decision on Tuesday, February 18.

Economists at Capital Economists changed their call following the inflation figures and now expect a rate cut in February.

“The big picture is that today’s data should increase the RBA’s confidence that underlying inflation is declining sustainably towards target,” economist Abhijit Surya said.“
Source: https://www.abc.net.au/news/2025-01-29/inflation-q4-consumer-price-index-cost-of-living/104870480 

Conclusion: A Season of Change

In summary, the recent slowdown in inflation presents a critical turning point for the RBA and the Australian economy at large. As markets await the bank’s next moves, there is a palpable sense of anticipation surrounding potential interest rate cuts. If the RBA acts decisively, it could enhance economic stability and support household budgets, ultimately steering Australia toward a promising economic future. With the right measures, 2025 may indeed become the year Australians see tangible relief from the burden of inflation.

This article is references: https://www.abc.net.au/news/2025-01-29/inflation-q4-consumer-price-index-cost-of-living/104870480