Australia’s inflation falls to four-year low in December quarter amid government subsidies

Financial markets consider an interest rate cut a all but done deal for February after inflation fell to its lowest level since 2021, aided by temporary cost of living subsidies.

Economists expect the Reserve Bank to offer mortgage relief to households when it meets next month after inflation eased more than expected in the December quarter to its lowest level since March 2021.

The Australian Bureau of Statistics reported on Wednesday that the RBA’s preferred inflation measure, trimmed mean, dropped to 3.2 per cent in the year to December compared to 3.5 per cent in September. It was less than the 3.3 per cent forecasted by financial markets and below the 3.4 per cent expected by the RBA.

The trimmed mean excluded price falls in both electricity and automotive fuel in the quarter.

Financial markets have priced in an 80 per cent chance of a 25 basis point cut in the cash rate to 4.1 per cent, along with Commonwealth Bank, ANZ and Westpac, when the RBA conducts its first board meeting on February 17 and 18.

The prospect of a rate cut next month spurred on the share market, lifting the S&P/ASX 200 up 0.6 per cent to 8447, while it was bad news for the dollar, which fell 0.3 per cent to US62.41c near the close.

Commonwealth Bank chief economist Gareth Aird said a February rate cut was a done deal, adding that struggling households would see a gradual easing this year of one 25 basis point reduction each quarter to end 2025 at 3.35 per cent.

“The RBA will be encouraged by (Wednesday’s) CPI data. And we think it will be deemed as sufficiently good for the Board to conclude at its February meeting that it is time to take monetary policy towards a more neutral setting by cutting the cash rate,” he said.

“Today’s inflation report was overall a little softer than the market expectation, but very much in line with our forecasts. Importantly it was materially softer than the RBA had anticipated when it published its latest forecasts in the November Statement on Monetary Policy (SMP).”

RateCity has forecasted that one 25 basis point rate cut would reduce repayments on a $500,000 loan by $75 per month.

The headline Consumer Price Index (CPI) indicator increased 2.4 per cent in December compared to 2.8 per cent in September — lowest reading since 1.1 per cent in March 2021.

The result was lower than the 2.5 per cent markets had expected, and down from the peak of 8.4 per cent in December 2022.

The annual headline inflation rate was artificially lowered by temporary federal and state energy bill rebates. Electricity prices were down 25.2 per cent in the past year as a result of those measures than end on June 30.

Without the rebates, ABS head of prices statistics Michelle Marquardt said electricity prices would have risen 0.2 per cent this quarter.

The RBA has avoided a rate cut as it looked for inflation to “sustainably” get back down to target range and stay there, which Ms Bullock said in September was that it needed to see inflation get to its target band and stay there.

In December, the RBA judged that the upside risk to inflation had diminished, but that it was too soon to conclude with full confidence that inflation was moving sustainably towards target.

KPMG chief economist Brendan Rynne said headline inflation was no longer a reliable measure for informing monetary policy due to cost of living relief packages, adding the distortion had created an usually large discrepancy between headline and core inflation.

“We have to rely on core inflation – and that is still above target and showing that price pressures in the economy remain stubborn. The RBA wants to see inflation sustainably within the target band and we are just not there yet,” he said.

“Assuming core inflation continues to fall over the coming months we believe that the RBA will be in a position to cut rates in May, with April a possibility.”

The RBA forecasted in November that headline inflation to fall to 2.5 per cent by June, but end 2025 at 3.7 per cent as a result of subsidies ending, while trimmed mean would ease to 2.8 per cent by December.

Betashares chief economist David Bassanese said there was now a chance trimmed mean inflation could now fall within the RBA’s 2-3 per cent inflation target band by June, rather than December.

“As a result – and despite still solid employment growth – there’s no question the economy deserves an interest-rate cut to ease the restrictiveness of current policy settings,” he said.

Mr Bassanese expected a February cut and a further two cuts this year after confirmation of further declines in inflation.

EY chief economist Cherelle Murphy said a February rate cut was not a done deal due to a tight labour market and services inflation elevated at 4.3 per cent due to strong rental, health insurance pressures.

“The RBA will place great emphasis on (Wednesday’s) numbers, but also assess other domestic conditions and international economic pressures, including geopolitical tensions and potential blanket tariffs from the Trump Administration, which could drive inflation higher,” she said.

“There are risks from the tight labour market – which when combined with low labour productivity growth – may put upward pressure on unit labour costs,”

The main contributors to the quarterly rise of 0.2 per cent in the December quarter were a 1.5 per cent uplift in recreation and culture and 2.4 per cent in alcohol and tobacco. These rises were largely offset by falls in Housing (-0.7 per cent) and Transport (-0.7 per cent).

Annual inflation for Non-discretionary items fell to 1.8 per cent while annual inflation for Discretionary items rose to 3.2 per cent.

Originally published as Australia’s inflation falls to four-year low in December quarter amid government subsidies