Australia's inflation rate has taken a significant tumble, dropping to 2.4% for the December quarter of 2024, marking the lowest rate since March 2021. This decrease, reported by the Australian Bureau of Statistics (ABS), raises the prospect of interest rate cuts by the Reserve Bank of Australia (RBA) as soon as their upcoming meeting on February 18, 2025.
Following a peak of 7.8% in December 2022, inflation has now been on the decline for seven out of the past eight quarters. Core inflation, another key indicator monitored by the RBA, also saw a considerable fall, dipping to 3.2% from 3.6% the previous quarter, slightly below expectations from economic analysts.
According to Charles Croucher, the chief political editor at 9News, this data signifies positive news for mortgage holders and small business owners, stating, "It's the lowest end of what some of the banks were saying it would be. If you are a mortgage holder or a small business owner, this is about as good a set of numbers as you could have asked for." This sentiment reflects the broader relief felt by many Australians weary of rising costs of living.
The notable decline can be attributed largely to the government’s Commonwealth Energy Bill Relief Fund, which has helped bring electricity prices down sharply. Michelle Marquardt, ABS head of prices statistics, explained, "The rebates led to a large fall in electricity prices this quarter," noting they dropped by 9.9% following earlier declines of 17.3%.
Meanwhile, the transportation and housing sectors also contributed to lowering inflation rates. Petrol prices, for example, fell by 7.9% year-on-year, benefiting from decreases in global oil prices. This moderation extends to the housing market where annual rent growth has slowed significantly from 7.3% to 6.4% due to increased Commonwealth Rent Assistance.
Despite these favorable changes, some sectors continue to experience pressure. Notably, the price of tobacco rose by 12.2%, and rising insurance costs have stimulated discussions on the potential for adjustments to the approach taken by insurers to risk assessments amid climate change concerns.
Analysts have been quick to react to the data, with Bendigo Bank's chief economist David Robertson stating, "The slightly lower-than-expected Q4 inflation data opens the door for a February RBA rate cut, and validates our forecast of three cuts in 2025." This assertion has led to financial markets pricing in an 84% chance of interest rate cuts when the RBA convenes.
Despite the positive indicators, it remains unclear if the RBA will execute the anticipated rates change so soon. Devika Shivadekar, economist at RSM Australia, expressed, "A rate cut is still on the table; the likelihood is evenly split but skewing slightly toward holding off for the moment." RBA officials have hinted at adopting caution, ensuring the decline is sustainable before making such decisions.
Looking forward, analysts are optimistic about the possibility of continued declines. David Bassanese, chief economist at Betashares, exclaims, "There’s no question the economy deserves an interest rate cut to ease the restrictiveness of current policy settings. I anticipate the Reserve Bank will welcome these inflation results and reward hard-pressed households and mortgage holders with an interest rate cut at the February 17-18 policy meeting.”
The forthcoming months will be pivotal for Australian consumers, especially as the government prepares for potential elections. The economic climate, paired with the declining inflation rates, suggests movement toward alleviating some of the financial burdens faced by many households.
Overall, the recent inflation trends present both opportunities and challenges for the RBA and Australian consumers. With expectations of potential interest rate cuts looming, borrowers might find themselves with some much-needed relief, but the central bank's caution underlines the complexity of the economic realities at play.