Inflation holds steady in January bolstering rate cut hopes

Households, eagerly awaiting rate cuts, received some good news when the inflation rate was unchanged in January.

Indebted households, eagerly awaiting rate cuts, may have to wait longer still for relief from the Reserve Bank. Picture: Dan Peled / NCA NewsWire,

Inflation rose less sharply than anticipated in January, indicating the Reserve Bank’s past interest rate increases are working through the economy as intended and bolstering hopes rate cuts may come sooner than expected.

Consumer prices rose 3.4 per cent in January from a year earlier, unchanged from their reading in December, the Bureau of Statistics reported on Wednesday, lower than expectations of a 3.6 per cent increase.

Following Wednesday’s inflation update, bond traders brought forward their bets that the RBA will cut rates from their current 12-year high of 4.35 per cent.

Money markets now imply a 67 per cent chance of a cut at the central bank’s August meeting, and are fully priced for easing September.

Prior to the fresh inflation print, traders were expecting cuts from November.

Economists also believe the softer-than-expected inflation result could enable the RBA to bring forward the timing of rate cuts – but not to its next board meeting scheduled for March 18-19, where it is widely expected to keep interest rates on hold for a third consecutive time.

“We believe [the RBA] might reduce the cash rate sooner and faster than currently envisaged,” KPMG chief economist Dr Brendan Rynne said.

Fresh GDP figures, to be released by the ABS next week, would provide further clues on where the RBA would move next, Dr Rynne added. 

“There is a risk that Australia could not only be in a per-capita recession but could also tip into a technical recession.”

Betashares chief economist David Bassanese agreed the central bank could cut more aggressively than markets had previously anticipated.

“The CPI result remains consistent with my view that the RBA will have capacity to cut interest rates at least twice in the final months of 2024.”

But some analysts cautioned the monthly reading, which had a higher representation of goods and is more volatile, would likely overstate the progress made on reducing price pressures.

Indeed, EY senior economist Paula Gadsby said the result should be “read with some caution” given limitations with the data.

“Talks of rate cuts could be premature as risks persist into 2024, especially if wages growth – the major driver of inflation – fails to ease, and productivity doesn’t pick up to the long-run levels the Reserve Bank is counting on,” she said.

The fresh inflation data is the only measure of consumer price growth the RBA will receive before its next meeting. Picture: NCA NewsWire / Martin Ollman

In its latest set of forecasts, released in early February, the RBA expects consumer price growth to remain above its 2 to 3 per cent inflation targeting ban until the second half of 2025.

January’s result was driven by higher prices for food and non-alcoholic beverages, up 4.4 per cent, housing, up 4.6 per cent, alcohol and tobacco, up 6.7 per cent, and insurance and financial services, up 8.2 per cent.

The Albanese government’s interventions to lower power bills also took some of the sting out of higher prices, with rebates helping to moderate price growth to just 0.8 per cent.

Rental prices continued to increase, rising by 7.4 per cent in the year to January, and also unchanged from December’s result.

Trimmed mean inflation, the RBA’s preferred measure of the price growth, which strips out volatile items including food and petrol, eased – rising just 3.8 per cent, and de-accelerating from 4 per cent in December.

Responding to the figures, Treasurer Jim Chalmers said the government was making “welcome progress” on lowering inflation.

“The direction of travel is clear: inflation is moderating helped by the Albanese government’s cost-of-living policies,” Dr Chalmers said.

But shadow treasurer Angus Taylor pointed to the fact that inflation still remained above the RBA’s target which meant households were making “significant sacrifices” as a result.

“We’re seeing Australian families struggling across the board with rising prices of housing, rising insurance costs, rising energy costs,” he told reporters in Canberra.

Originally published as Inflation holds steady in January bolstering rate cut hopes