Chalmers praises inflation fighting efforts as underlying price pressures accelerate

Jim Chalmers has praised the ‘very encouraging progress’ in the fight to curb persistent price pressures, even as more economists jettisoned their forecasts for rate relief in early 2025.

Jim Chalmers on Wednesday praised recent progress on inflation. Picture: NewsWire / Martin Ollman

Jim Chalmers has praised the “very encouraging progress” in the fight to curb persistent price pressures, even as underlying inflation accelerated last month and more economists jettisoned forecasts for rate relief in early 2025.

The Reserve Bank’s preferred trimmed-mean price gauge rebounded to 3.5 per cent in the 12 months to October, the Australian Bureau of Statistics reported on Wednesday, up from 3.2 per cent in September and still well above the RBA’s 2-3 per cent target band.

Speaking in parliament’s question time, the Treasurer welcomed the fresh figures, emphasising the headline inflation rate, which held at 2.1 per cent in October after federal and state power bill rebates delivered a record reduction in electricity prices.

“The new inflation numbers today show that inflation for the month was 2.1 per cent,” Dr Chalmers said. “It was 6.1 per cent under those opposite. Monthly inflation is a third of the 6.1 per cent we inherited.”

Opposition Treasury spokesman Angus Taylor remarked that the figures indicated the “disastrous situation” facing households, and said Labor had overseen the most severe reduction in living standards of any advanced economy.

“We’ve seen the cost of living for a typical working family in Australia up over 18 per cent since Labor came to power, and it continues to go up,” Mr Taylor said.

With the government hoping for rate cuts to improve its standing among cash-strapped household borrowers, signs of stubborn underlying inflationary pressures have prompted economists and investors to delay their rate cut bets in recent weeks.

Analysts at Westpac, NAB, RBC Capital Markets and Citi are among those forecasters who have pushed back their rate cut calls from February 18 to May 20, just five days before the cut-off for a federal election.

KPMG chief economist Brendan Rynne warned that hopes of an early interest rate cut were “fading”, with the October inflation figures prompting him to abandon his previous prediction of a February rate reduction.

“It seems the continuation of high government spending, elevated population growth, limited increases in the stock of dwellings and tightness in the labour market due to strong public sector employment, will all combine to see the first rate cut of 2025 pushed back to around mid-year,” Dr Rynne said.

While retaining their February rate cut call, analysts at AMP conceded underlying inflationary pressures risked keeping the cash rate on hold for longer.

“There are certainly more risks leaning towards a later start to the cutting cycle,” AMP economist My Bui said.

Underscoring concerns raised by RBA governor Michele Bullock, the October inflation report revealed a further acceleration in the labour-intensive services sector, which lifted by 4.8 per cent in the year to October, and up from 4.4 per cent in September.

Compared with 12 months earlier, rents continued to rise strongly, up 6.7 per cent. Insurance and financial services costs increased by 6.3 per cent, while education fees also climbed by a similar amount.

Meanwhile, a record reduction in electricity prices – which dived by a remarkable 35.6 per cent in the 12 months to October – took a hefty 0.9 percentage points off the headline inflation rate.

Ms Bullock has repeatedly stressed, however, that the central bank will look through the headline measure, which has been distorted by temporary government support.

After the rebates expire in mid-2025, the RBA forecasts the headline inflation rate will rebound to 3.7 per cent by the end of 2025 and will not sustainably return to inside its target band until the end of 2026.

With Dr Chalmers foreshadowing further spending in the lead-up to the election, including an extension of the power bill rebates, UBS chief economist George Tharenou said additional expenditure, along with president-elect Donald Trump’s planned tariffs, risked keeping interest rates higher for longer. “This could result in the RBA delaying the first rate cut to August 2025, or not cutting rates below ‘neutral’ – (that is) they stop easing around 3.5 per cent,” he said.

As the monthly inflation figures did not capture the full basket of goods and services measured in more comprehensive quarterly readings, Citi chief economist Josh Williamson cautioned that the data had been disproportionately affected by government rebates and subsidies.

“For the remaining months of the quarter, price discovery will be weighted toward items where prices are based on market forces, some of which have remained sticky,” Mr Williamson said.