The fourth-quarter consumer price index (CPI) released last week opened the door for the Reserve Bank board to begin lowering the cash rate in February. Heading to last week’s release, market pricing indicated close to 80% probability of a 25-basis point cut next month. The release confirmed inflation is moving lower, with the trimmed mean inflation measure undershooting the RBA's expectations and confirming an accelerated disinflation pulse as the year came to a close.
This undershoot is expected to give the Reserve Bank confidence to begin the rate-cutting path next February, with underlying inflation on track to return sustainably to the RBA's target of 2% to 3%. For the 12 months leading to December 2024, the headline CPI rose 2.4%. This marked the lowest annual rise since the March 2021 quarter and the lowest quarterly rise (0.2%) since June 2020, propelled by significant price decreases for electricity and petrol, along with moderations in new dwellings costs.
Despite the positive trends, the recent falls have been significantly aided by cost-of-living relief measures from both federal and state governments, including electricity rebates. Consequently, the RBA remains focused on underlying inflation's sustainable return to its target band. The most preferred measure of underlying inflation from the RBA, the trimmed mean, rose by 0.5% in Q4 2024. This quarterly rise, the lowest since Q2 2021, indicates an annualized pace of 2.02%, placing trimmed mean inflation back within the 2-3% range at the end of last year.
Annual trimmed mean inflation also saw decline, easing to 3.2% year-on-year, down from 3.6% the previous quarter. This positions underlying inflation at its lowest level since December 2021 and under the RBA’s forecast of 3.4%, giving the RBA reason to reassess and bolster confidence in achieving consistent target returns.
With the potential of interest rate cuts fast approaching, market players remain watchful. Though the likelihood of cuts early next year seems strong, with labor markets still holding up, there may be delays until May for the RBA to adequately evaluate economic indicators. This uncertainty can be unsettling for potential homebuyers; nonetheless, some may want to secure purchases before any potential price rises as rates drop.
Historically, it has been seen as advantageous to buy before interest rates fall, and many anticipate increased home prices correlatively as the diminished borrowing costs revive buyer confidence. While home prices are expected to ascend this year with the anticipated reductions, the potential appreciation might be more subdued than previously experienced due to current affordability pressures.
Working households particularly have begun to experience the least price pressures since 2020, with inflation easing noticeably across Australia. Recently released data from the Australian Bureau of Statistics indicated price increases slowed among various households during the December quarter, evidenced by lower electricity costs, cheaper fuel, and enhanced Commonwealth Rent Assistance.
The new figures offer promising insights to the government as it prepares for the upcoming election—cost of living is poised to be pivotal for voters discontented by inflation. The reported shifts starkly differ from the commonly discussed CPI figures, primarily due to the proportion of older Australians' spending on fresh food against working families who often face higher mortgage burdens.
The CPI for the December quarter showed only a 0.2% rise overall. The biggest spending category—housing costs—decreased across different households aided by federal energy bill relief. Electricity prices plummeted 9.9% for the quarter and 25% over the year, substantially lightening the load on many households.
Nevertheless, mortgage interest charges—a heavier burden for working families—notably increased by 1.7% due to mounting mortgage debt levels as many twisted from fixed rates to elevated variable rates. Fortunately, this growth rate is down from 2.7% observed during the September quarter, with overall living costs dropping for the third consecutive quarter.
Rents have continued to rise, yet the government’s increase of 10% to the maximum Commonwealth Rent Assistance rate—complimented by regular biannual changes—lessened the rent payments for many involved. This shift saw housing costs dip by over 2% for pensioners, with self-funded retirees witnessing reductions of 2% and 1.7%, respectively.
Cheaper prices at the fuel stations, mainly influenced by weaker global oil prices, also brought relief to families during this period. Transportation costs fell thanks to regional government initiatives lowering public transport fares across Tasmania and Queensland.
For all groups, rising alcohol and tobacco prices from increased taxes pose the most considerable cost pressures, followed closely by recreation and culture so popular during school holidays, alongside climbing insurance and financial services costs. The living cost indexes from 12 months to December 2024 showed rises between 2.5% for pensioners to 4% for working households, reflecting the varied economic strains.
Regarding this inflationary discourse, shadow treasurer Angus Taylor remarked, "The cost of living for hard-working families across Australia is up 19.4% since Labor came to power." His strong words resonate with those battling increasing bills, particularly as educated families try managing school expenses on top of essentials.
Towards the end of 2023, inflation for working families had peaked near 10%, driven heavily by mortgage interest hikes. Yet, the ABS head of price statistics noted significant deceleration across premiums, mortgage interest rates, and food prices, contributing to the lowest annual increase observed over two years for living costs.
Treasurer Jim Chalmers highlighted the achievements made under the government's gaze, stating, "We’ve made this substantial and sustained progress on inflation at the same time as we’ve seen the creation of more than 1.1 million new jobs." He reaffirmed the importance of continuing forward momentum, citing inflation improvements, low unemployment rates, and steady growth avoidance against global uncertainties.