It felt like the countdown to a rocket launch – the release of the CPI figures for the December quarter 2024. Normally, the releases of the Australian Bureau of Statistics figures come and go and no one takes too much notice.
There is a lot riding on how the Reserve Bank interprets the result. Needless to say, the bank won’t be relying on a single CPI figure to determine whether or not the cash rate should be cut at its February 17-18 meeting. There will be a wide range of figures and market intelligence that feeds into the decision, but this CPI release is very important.
Three very important additional considerations are the ongoing tight labour market; the low and falling value of the Australian dollar; and the ongoing high rate of services inflation as opposed to goods inflation.
The key figure in the ABS release is the rise of 3.2 per cent in the trimmed mean CPI in the December quarter, a measure that factors out volatile and extreme elements from the calculation. This figure is down from 3.6 per cent (revised up) in the September quarter. The bank focuses on the trimmed mean.
By contrast, the headline figure for the December quarter was 2.4 per cent, down from 2.8 per cent in the September quarter. Both the trimmed mean and the headline figures are marginally below the prior consensus estimates. No doubt, the Treasurer, Jim Chalmers, will be bragging about this headline figure, the trimmed mean outcomes still being above the bank’s annual target range of 2 to 3 per cent.
Last year, the bank’s governor, Michele Bullock, stressed the need for inflation to be sustainably in the annual range before cutting the cash rate. This points to a degree of caution lest the cash rate is cut too soon and inflation then fails to stay in the target band. This would be widely marked as a monetary policy failure.
Notwithstanding the ongoing declaration of both Anthony Albanese and Chalmers of their respect for the independence of the RBA, a lot of nudging has been going on for some time. When Chalmers declared last year that high interest rates were “smashing the economy”, he was in effect telling the bank what to do.
In this sense, the RBA’s February meeting is a test of its independence. To be sure, if the case for a cut is overwhelming, the bank should make this call. But if there is a high degree of uncertainty about the course of inflation over the coming year, it should hold, even in the face of considerable political pressures.
Unfortunately, the CPI result puts the bank’s decision spectrum somewhere between a clear-cut case for a rate cut and a hold on the cash rate. The bond traders will probably put a high probability on a cut – most likely 25 basis points. The government will argue that the case for a cut is now compelling.
There will now be another rocket launch-type countdown come February 18.
As the election approaches, the political benefit for the Labor government of a cash rate cut is that it would quickly feed into lower mortgage rates and provide a degree of financial relief for indebted homeowners. It would be a demonstration that the inflation beast has been conquered, although bear in mind prices won’t be reverting to their 2021 levels. Prices have increased by around 15 per cent since then.
Mind you, the Fed in the US cut its official interest rates several times leading up to the election there in November. It was insufficient to save Biden/Harris from defeat.
Judith Sloan is The Australian’s contributing economics editor. She is an economist and company director.
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