By Shane Wright
The lowest rate of inflation in almost three years may not be enough to deliver mortgage relief to millions of cash-strapped Australians and could force Prime Minister Anthony Albanese to push back plans for the federal election into May.
Figures to be released on Wednesday by the Australian Bureau of Statistics are expected to show inflation over the past 12 months at about 2.5 per cent as prices for goods and services, particularly in the housing construction sector, ease.
Inflation is likely to fall to a new three-year low, but it may not be enough to force the Reserve Bank to cut interest rates.Credit: Getty
Underlying inflation, closely watched by the Reserve Bank, is also tipped to ease to 0.5 per cent in the December quarter. Many economists note at that level, the annualised rate of underlying inflation over the final six months of 2024 would be at its lowest rate since late 2021 and at the mid-point of the RBA’s 2-3 per cent inflation target.
But the steep fall in both overall and underlying inflation may not be enough for the Reserve Bank to use its February 17-18 meeting to begin cutting interest rates for the first time since the depths of the COVID pandemic in late 2020.
Barrenjoey chief economist Jo Masters said several factors could force the Reserve to hold fire.
She said subsidies, such as those reducing the prices of electricity and rents, were distorting the overall inflation rate. The recent fall in the Australian dollar was adding to inflationary pressures while growing uncertainty over the global economy, including President Donald Trump’s plans for tariffs, made the outlook difficult to decipher.
Masters also said the make-up of the RBA board changing in coming weeks, with the bank’s new monetary policy board with incoming members Renee Fry-McKibbin and Marnie Baker due to start from February 28, would affect the decision.
“It’s a big change to the board membership. Do you start a new policy direction when you’re going to have a new board?” she said.
“This CPI print is cloudy. You’ll have a pretty good number, but there are a host of factors around that will make it difficult for the RBA.”
The more volatile monthly measure of inflation suggests price pressures in some parts of the economy are easing.
The November monthly release showed new home construction costs dropped by 0.6 per cent that month due to builders offering discounts to entice new customers. Annual construction inflation fell to 2.8 per cent, its lowest level since mid-2021, after peaking at more than 20 per cent in 2022.
An inflation rate around 2.5 per cent would bring Australia into line with most of the world’s major economies. Inflation in the United States has lifted over recent months to 2.9 per cent, in Britain – which has suffered five negative months of growth over the past year – it is at 2.5 per cent while in Germany it is 2.6 per cent.
Inflation is lower in countries such as New Zealand, Canada and France.
Treasurer Jim Chalmers said Australia was doing well in combatting inflation by any international comparison.
“When we came to office inflation was north of six per cent and rising fast, now it has a two in front of it. When we came to office, real wages, incomes and living standards were all falling fast, and we’ve been able to start to turn that around,” he said.
Inflation, living standards and wages will feature prominently in the federal election that will be held on or before May 17.
Government MPs believe Albanese would use an interest rate cut at the Reserve Bank’s February meeting to call an election for early April. Financial markets put the chance of a February rate cut at 80 per cent, but also believe if the RBA holds fire, it will move at its April 1 meeting.
Opposition Leader Peter Dutton, accusing the government of wrecking the economy, said he wanted to see official interest rates “come down as quickly as possible”.
Liberal leader Peter Dutton says he wants to see interest rates falling as quickly as possible.Credit: Janie Barrett
“Ultimately, the Reserve Bank governor has the responsibility to look at all of the economic settings, to see where inflation is, to see where unemployment is, to see where the other key indicators are, so that a properly informed decision can be made about whether interest rates come down,” he said.
The Reserve Bank, which on Wednesday will update its forecasts, most recently predicted headline inflation would slip to 2.6 per cent with underlying inflation easing to 3.4 per cent.
AMP chief economist Shane Oliver, who is tipping inflation to have slowed to 2.4 per cent, said the figures were likely to force the Reserve Bank to revise down its expectations for the economy.
“If the trimmed mean inflation rate cools in line with our expectations it will be very hard for the RBA not to cut rates at its February meeting,” he said.
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