Bad news for back-to-back rate cuts

Table of Contents

The Australian Bureau of Statistics' January inflation report shows that trimmed mean inflation, which the Reserve Bank uses to measure Australia's inflation rate, came in at 2.8 per cent, up from 2.7 per cent in December.

While the CPI figures for Wednesday are only a one-off snapshot, they provide the RBA with a general idea of where Australia's inflation rate is headed, with a lower number increasing the chances of a rate cut when the board meets again on 1 April.

The headline inflation rate increased to 2.5 per cent over the 12 months until January 2025.

Tuesday's announcement was in line with what economists had been expecting. The CBA forecast said that the overall inflation rate was likely to increase to 2.7 per cent over the past 12 months, and the trimmed mean inflation rate was expected to be 2.8 per cent.

VanEck investment chief Russel Chesler said another interest rate cut in the short-term was unlikely.

“While the general opinion in the market has moved towards a probability of about 80 per cent that the next interest rate cut will be in May, we don't think that's going to happen until later in the year,” he said.

“The recent rate cut doesn’t mean we've got inflation under wraps – if anything, we'll be treading carefully for the rest of the year until we've had a decent run of lower inflation.”

According to Mr Chesler, with unemployment steady, strong retail sales and governments splashing out before an election, the data doesn't back further cuts.

“We’re still experiencing a pretty tight labour market and it could get even tighter. Job ads went up in December 2024 and January 2025, according to the ANZ Job Ads report, and with the recent interest rate cut, there’s a good chance employment opportunities will increase even further, thanks to businesses feeling more confident in the stability of the economy,” he said.

Saxo chief investment officer Charu Chanana said that while Wednesday's figures didn't give us the full picture, they did give us a glimpse of what's to come.

“The bigger picture’s one of inflation easing off, which is why the RBA’s decision to chop the cash rate by 25 basis points this month stacks up,” Ms Chanana said.

BetaShare chief economist David Bassanese said it's unlikely that there'll be a rate cut in April, but the chances of a cut in May have strengthened.

“The good news, however, was that the annual trimmed mean inflation rate only went back up a bit, from 2.7 per cent to 2.8 per cent, which is a positive sign for another encouraging quarterly CPI report when it comes out in late April, mate,” he said.

“Of course, the monthly CPI can be pretty unpredictable and there's still room for it to rebound further in February and March.”

While overall inflation was increasing, there were signs that the rate of cost of living pain for households was beginning to ease off.

Rent inflation dropped to 5.8% from 6.2%, and new homes inflation eased to 2% from 2.3%. It's the lowest annual increase in new home prices since June 2021.

The ABS said the slowdown in annual new dwellings inflation was due to an improvement in the supply of materials and labour, as well as businesses offering discounts to get Australians into the market.

Housing was still one of the biggest contributors, up 2.1 per cent for the year.

The other major categories were food and drinks, excluding booze, which is going up by an average of 3.3 per cent compared to this time last year, and booze and tobacco, which jumped by 6.4 per cent.

The rise in annual food inflation was largely led by an increase in the cost of fruit, which was 12.3 per cent higher than a year ago.

Most of the annual inflation increase in the housing group up to January was due to rising electricity prices for some Queensland households, as the government removed temporary assistance in the form of electricity rebates.

“Electricity rebates bring down the cost of power for Aussie households. The Queensland government gave a one-off electricity rebate of $1,000 from July 2024. This rebate was higher than the average power bill for Queensland homes. The effect of the rebates was less in January than December as some households had used up the full value of the rebate.’ ABS head of prices statistics Michelle Marquardt said.

While not the full CPI and the first month of the quarter is "goods heavy", it's the first inflation gauge since the RBA's rate cut earlier this month.

The RBA dropped 25 basis points off the cash rate, bringing it down to 4.10 per cent.

This was the first rate cut since November 2023 and the first rate cut in more than four years.

However, Governor Michele Bullock has warned Aussies who are feeling the pinch will need to "be patient", as the battle against inflation is far from over.