Australia’s core inflation slows, keeping door open to February rate cut
AUSTRALIAN consumer price inflation crept up from three-year lows in November as electricity costs jumped, but a drop in core inflation still bolstered the case for a cut in interest rates as early as next month.
The Australian dollar slipped 0.34 per cent to US$0.6214, while three-year bond futures reversed earlier losses to be up 4 ticks to 96.11. Swaps now imply a 64 per cent chance for a rate cut in February, compared with 50 per cent before.
Data from the Australian Bureau of Statistics on Wednesday showed its monthly consumer price index rose at an annual pace of 2.3 per cent in November, up from 2.1 per cent the previous month and just above market forecasts of 2.2 per cent.
Electricity prices jumped 22 per cent in November but that was largely due to the timing of government rebates. Electricity subsidies from the federal and state governments still lowered prices by 21.5 per cent from a year prior.
More importantly, the trimmed mean - a closely watched measure of core inflation - fell to an annual 3.2 per cent from 3.5 per cent, edging closer to the Reserve Bank of Australia’s target band of 2 per cent to 3 per cent.
“The good news is that measures of core inflation suggest that underlying price pressures are indeed easing in earnest,” said Abhijit Surya, the Australia and New Zealand economist for Capital Economics.
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Surya said if the result is replicated in the quarterly CPI report due later this month, it would give the RBA greater confidence that it is on track to meet its inflation mandate.
“The upshot is that today’s data raise the risk that the RBA will begin its easing cycle earlier than May, as we’re currently predicting,” he said.
The central bank has kept interest rates steady for over a year now, judging that the cash rate of 4.35 per cent, up from a record-low 0.1 per cent during the pandemic, is restrictive enough to bring inflation to its target band while preserving employment gains.
The labour market has stayed surprisingly resilient. Data also out on Wednesday showed job vacancies rebounded in the November quarter to break nine quarters of declines.
The central bank unexpectedly turned dovish last month as economic growth remained anaemic. A rate cut in February will make it easier for the centre-left Labor government to call an early election, which is due no later than May.
Treasurer Jim Chalmers on Wednesday welcomed the slowdown in underlying inflation.
“We are very encouraged by the substantial and sustained progress we have made... The Reserve Bank will factor all of that in when it meets at the next occasion and subsequently throughout the year,” he said.
The government is planning to compile a pre-election budget in March.
The November report provided price updates on a range of services that were not included in the previous month. Prices for hairdressing and personal grooming rose 5.6 per cent from a year prior, but the services inflation rate overall was flat from the prior month, at an annual 4.1 per cent.
Prices for building and renovating new homes rose just 2.8 per cent from a year prior, the lowest annual rise since July 2021, due to builders offering discounts to promote business. REUTERS
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