Reserve Bank board will feel more confident inflation is contained

Michele Bullock and the other eight members of the RBA board will meet on February 17-18 to make the next monetary policy decision. Picture: NewsWire / Jeremy Piper

One swallow doesn’t make a summer, but the data gods and financial markets have let loose the doves.

Michele Bullock and the Reserve Bank board will now have greater confidence to cut the cash rate next month given they have clearer evidence inflation is falling sustainably to the target zone.

The December quarter consumer price index, with underlying inflation of 3.2 per cent, was weaker than the RBA’s current staff forecasts.

As the board’s minutes revealed last month, “if that were to occur, members concluded that it would, in due course, be appropriate to begin relaxing the degree of monetary policy tightness”.

Bond markets are pricing the chance of a rate cut on February 18 at 80 per cent.

Not a “done deal”, with some analysts pointing to demand still outrunning supply at the end of last year, but a welcome sign that a return to policy normal is within sight.

Wednesday’s figures showed the price of goods increased by a mere 0.8 per cent over the 12 months to December; two years earlier, at the peak of the cycle, goods inflation was almost 10 per cent.

The annual rise in the cost of consumer essentials – food, fuel, electricity and housing – was 1.8 per cent, compared with 8.4 per cent in December 2022.

Disinflation, as the policy wonks call it, is clear and present, helped down the slope with a mighty push from the RBA’s cash-rate crunch and government energy rebates.

If there’s a worry in the official numbers, it’s that services inflation – driven lately by rents, medical and hospital services, and insurance – has been stuck at about 4.5 per cent for the past five quarters.

The RBA, and its peer central banks, are perturbed by the persistence of underlying inflation and it is holding back the speed of rate cuts in some countries, most notably in the US where the Fed is on watch.

“Services price inflation globally had been more persistent than expected and this could also prove to be the case in Australia,” December’s RBA board minutes said.

Also, even though wage pressures have eased, the strength of employment and a chronically woeful productivity performance mean that our officials are far from convinced that the price embers won’t flare when the wind picks up.

Jim Chalmers is never short of confidence; in the nation’s resilience and his own abilities as Labor’s custodian.

“The soft landing we have been planning and preparing for is looking more and more likely,” the Treasurer said.

The vibe may be infectious, one homeowners and investors are itching to believe in.

But the RBA board craves cold, hard data and may not yet be convinced the fight is over.

Australia is on the “narrow path” to lower inflation and limited job losses, but you’d be more positive about us reaching the sweet spot, and staying there, if governments spent less and did more to raise the speed limits on our economy.