Inflation growth at 2-year low

The latest data on the Consumer Price Index (CPI) released by the Australian Bureau of Statistics (ABS) has shown a rise of 0.6 per cent in the December 2023 quarter, down from the 1.2 per cent recorded in the September quarter, and 4.1 per cent annually.

Annual trimmed mean inflation was 4.2 per cent, down from 5.1 per cent recorded during the September quarter. This was the fourth consecutive quarter of lower annual trimmed mean inflation, down from the December 2022 peak of 6.8 per cent.

According to ABS head of prices statistics Michelle Marquardt, the December CPI rise has marked the smallest quarterly rise since the March 2021 quarter.

Annual inflation has now plummeted from its peak of 7.8 per cent in December 2022 despite prices continuing to rise for most goods and services.

Notably, these figures have returned below both the Reserve Bank of Australia’s (RBA) and the major bank economists’ forecasts for this quarter’s inflation.

The December quarter CPI figures were anticipated to be the final crucial piece of dataset to be released that would inform the RBA’s monetary policy decision in next week’s February meeting, with the big four banks all unanimously agreeing on a hold in the cash rate.

CoreLogic head of research, Eliza Owen said this fall in inflation reflects softer demand in the economy, with weakness showing in retail trade, job vacancies and rises in unemployment.

"But the good news about falling inflation is in its implications for monetary policy. The more inflation comes in under expectations, the firmer the case for interest rates remaining on hold next week, and coming down later this year.

"A reduction in interest rates is likely to boost housing demand. As seen in the rental market, fundamental demand for housing is very strong, but demand for home purchases has been influenced by high interest costs and limited borrowing capacity.

"The RBA would probably not consider more exuberance in the housing market an ideal scenario if interest rates comes down," Ms Owen said.

Reacting to the data, Zippy Financial director and principal broker Louisa Sanghera said the sharp drop in annual inflation has revealed that the RBA was “trigger happy” on rate hikes.

“Borrowers had to cope with the most rapid rate of interest rate increases on record as the Reserve Bank pumped up repayments, almost in a frenzy, without giving mortgage holders the benefit of allowing much time to pass between each increase,” Ms Sanghera said.

“The November rate rise, in particular, was completely unnecessary and I said as much at the time.

“Now, inflation has dropped so quickly that the Reserve Bank must move to an easing bias at its meeting in February with rate cuts on the agenda in coming months, too.”

Ms Sanghera noted that there has been a marked increase in inquiries from investors since late 2023, suggesting that many have recognised that the peak of the rate cycle has come and gone.

“There [has] also been a cohort of people who haven’t been proceeding with their real estate plans, whether it’s buying, selling, or investing, until there was more certainty on interest rates,” she said.

Housing (up 1 per cent), alcohol and tobacco (up 2.8 per cent), insurance and financial services (up 1.7 per cent) and food and non-alcoholic beverages (0.5 per cent) were the most significant contributors to the December quarter.

The housing category was primarily driven by new dwellings purchased by owner-occupiers (up 1.5 per cent), rents (up 0.9 per cent) and utilities (0.6 per cent).

“Higher labour and material costs contributed to price rises this quarter for construction of new dwellings. The 1.5 per cent increase is slightly higher than the 1.3 per cent rise in September 2023 quarter,” Ms Marquardt said.

On an annual basis, the 4.1 per cent CPI rise was mostly attributed to increases in housing (6.1 per cent), food and non-alcoholic beverages (4.5 per cent), and alcohol and tobacco (6.6 per cent).

Also released today (31 January) was the monthly CPI indicator for December, which rose 3.4 per cent in the 12 months to December, down from the 4.3 per cent rise in the 12 months to November.

[RELATED: December CPI forecast below RBA’s expectations: Economists]