
Today's softening Australian CPI has prompted the market to all but fully price a February rate cut. However, broader data suggests that the RBA could still hold a little longer but the governor would need to guide the market before the meeting.
The Consumer Price Index (CPI) rose +0.2% in the December quarter, the same as the prior quarter and slightly below the +0.3% consensus forecast, according to the ABS today.
Over the twelve months to the December 2024 quarter, the CPI rose +2.4%, down from +2.8% in the previous quarter and also below the +2.5% yoy estimate, following an adjustment to childcare costs.
The most significant price rises this quarter were Recreation and culture (+1.5%) and Alcohol and tobacco (+2.4%). Partially offsetting the rise were Housing (-0.7%) and Transport (-0.7%).
The main reasons for lower headline CPI inflation were due to a fall in electricity prices (-25.2% yoy) and automotive fuel (-7.9% yoy) and moderating price rises for new dwellings (+2.9% yoy). The introduction of the 2024-25 Commonwealth Energy Bill Relief Fund (EBRF) rebates from July 2024 was the main driver for the fall in electricity prices this quarter.
More importantly for RBA policy, trimmed mean inflation fell from an upwardly revised +3.6% in September to +3.2% in the December quarter, just above the 2%-3% target range.
There was still a significant +0.5% difference with the monthly trimmed mean series which was +2.7% yoy in December.
Non-discretionary inflation fell to +1.8% yoy while Discretionary annual inflation rose to +3.2% yoy. The drop in Non-discretionary inflation was also from lower prices for automotive fuel and electricity over the past 12 months, as well as lower inflation for food and non-alcoholic beverages, and new dwellings. This contributed to the lowest Non-discretionary annual inflation since the March 2021 quarter. Non-discretionary goods and services include those that households are less able to reduce their consumption of, like food, automotive fuel, housing and health costs, whereas Discretionary goods and services reflect more optional purchases.
Annual Services inflation was +4.3% in the December quarter, down from +4.6% in the September quarter. Higher prices for rents, medical and hospital services and insurance were the main contributors to Services inflation remaining elevated.
Michelle Marquardt, ABS head of prices statistics, said: "This was the lowest quarterly reading since the June 2020 quarter when the CPI fell during the COVID-19 outbreak when childcare was free […] The 2024-25 Commonwealth Energy Bill Relief Fund rebates led to a large fall in electricity prices this quarter. Without the rebates, electricity prices would have risen 0.2 per cent this quarter”.
S&P/ASX200 8,476 +0.9%, AUDUSD 0.6235 -0.3%, Aus 2yr 3.78% -7bps, Aus 10yr 4.37% -5bps
Fin-X Wealth View
The RBA will continue to look through the electricity rebate impacts and focus on underlying inflation measures.
The market has moved to price a 92% chance of a February cut. However, the end 2025 expected rate of 3.49% is only -0.07% below the estimate a month ago. So, the only question is really when the first cut will arrive.
Clearly, the trimmed mean measure has moved in the right direction but it remains above the 2%-3% target range. The move suggests that underlying inflation will be back in the target range by the end of next year, although this may require slowing growth and possibly the extension of the electricity subsidy.
Other indicators such as services and non-discretionary price pressures reconcile well with a tight labour market and a nominal retail sales growth rate of +3.0% yoy to November. These higher numbers are likely to be a concern.
Our view remains that global growth is softer than headline figures suggest. The risks remain skewed to the downside. On that basis, the Board could reasonably cut in three weeks. But the language of the RBA suggests it will take a significant change of heart to move quickly and it might not see the need to do so as soon as next month. If so, the governor will likely find a way to push back against current pricing before the meeting.



Disclaimer
The contents of this communication is prepared by Brerona Capital Asset Management Pty Ltd (A.C.N. 627 650 293; AFSL 520526). The information contained in this communication is general in nature and does not take into consideration any investors personal objectives, goals, needs and financial situation. You should not rely on the information contained in this document to make any investment decisions without first consulting an investment professional such as your financial adviser. Any unauthorised use of this document is prohibited. This document (including any attachments) is intended only for the addressee, it may contain information of a privileged and confidential nature. If you are not the addressee of this communication, you must not copy, reproduce, disseminate or use this email and its contents. If this communication has been received in error by you, please inform us immediately and securely delete. Sharing, transmitting, copying, disseminating all or part of the contents of this document may result in a breach of the Federal Privacy Legislation and or copyright and trademark infringement of Brerona Capital Asset Management Pty Ltd and its related entities.