By Shane Wright
The Reserve Bank is poised to resist signs that price pressures are evaporating across the economy and hold interest rates steady for the rest of the year despite inflation falling to its lowest level in three years.
Economists believe the bank will consider a rate cut at its February meeting next year, denying Christmas shoppers mortgage relief after the Australian Bureau of Statistics reported that overall prices rose by a lower-than-expected 0.2 per cent in three months to September.
Inflation fell to 2.8 per cent, the lowest headline rate since early 2021, with big drops in the prices for electricity, petrol, clothing and some key supermarket staples.
Inflation is at its lowest level in three years.Credit: Bloomberg
Electricity prices fell by 17.3 per cent, largely due to the federal government’s energy supplements, while petrol prices tumbled by 6.7 per cent. Petrol prices are at their lowest level since the June quarter of 2023.
Prices for dairy goods such as cheese and ice-cream, which in early 2023 were climbing at almost 20 per cent, are falling.
State-based concessions on public transport pushed down prices by 36 per cent in Darwin, by 30 per cent in Brisbane and by almost 5 per cent in Canberra.
The bureau’s monthly measure of inflation, also released on Wednesday, suggests prices are falling even faster. In the 12 months to September, inflation fell to 2.1 per cent and has been flat since June.
The prices of more than half the items tracked by the monthly inflation measure have increased by less than 2 per cent over the past year compared to 35 per cent of the items which have risen by more than 3 per cent.
Treasurer Jim Chalmers seized on the figures, saying they showed the progress on inflation since the government came to office when prices were growing at more than 6 per cent.
“If you take a step back for a moment and consider this data in relation to all the other numbers that we read about the economy, any objective observer would acknowledge inflation more than halved on our watch, real wages are growing again,” he said.
But shadow treasurer Angus Taylor said temporary subsidies had been used to artificially lower the inflation rate.
“There is still a long way to go in the battle towards a strong, low inflation economy in this country,” he said.
The Reserve Bank’s preferred measure of underlying inflation rose by 0.8 per cent in the quarter, taking the annual rate down to 3.5 per cent. The bank had forecast underlying inflation to reach 3.5 per cent by the end of the year.
The underlying measure excludes volatile items that show big increases or falls in inflation, such as electricity.
Again, the monthly measure suggests underlying inflation is falling faster than anticipated, reaching 3.2 per cent in September.
Services inflation increased marginally to 4.6 per cent from 4.5 per cent in the quarter, but this was overwhelmingly driven by childcare costs jumping as last year’s new subsidy system dropped out of the annual inflation measure.
Annual childcare inflation jumped from minus 5.7 per cent in the June quarter to 12.1 per cent in the September quarter.
Insurance prices continue to be a major issue. For a sixth consecutive quarter, annual insurance inflation was above 14 per cent. Prices rose by another 2.8 per cent in the September quarter alone.
International holiday travel and accommodation prices rose by 1.9 per cent which the ABS noted was due to high demand for international tours and accommodation, particularly in Europe.
Economists at the nation’s biggest home lender, the Commonwealth Bank, had expected the Reserve Bank to use its December meeting to cut the official cash rate from its current level of 4.35 per cent.
But its head of Australian economics, Gareth Aird, said a February rate cut was likely.
“The RBA will be encouraged by the CPI data. But the data was almost certainly a touch too strong on the key underlying measure for the board to entertain the idea of a rate decrease this year. The process of normalising the cash rate will be a story for 2025,” he said.
AMP senior economist Diana Mousina, who expects underlying inflation to ease to 3.3 per cent by year’s end, said the numbers suggested the bank would hold the cash rate steady until next year.
“While the labour market is holding up very well, the slowing in inflation should allow for rate cuts to commence from February 2025 as economic activity will remain subdued, employment growth is likely to soften and the unemployment rate should trend up a little from here,” she said.
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