Australian Consumer Price Inflation Update

SYDNEY (Reuters) – Australian consumer price inflation edged up from three-year lows in November due to a significant rise in electricity costs. Despite this increase, a decline in core inflation strengthens the argument for an interest rate cut as early as next month.

The Australian dollar dipped 0.34% to $0.6214, while three-year bond futures recovered slightly, rising 4 ticks to 96.11. Current swap indications show a 64% probability of a rate cut in February, an increase from the previous 50%.

Data from the Australian Bureau of Statistics revealed that the monthly consumer price index experienced an annual increase of 2.3% in November, rising from 2.1% the prior month and surpassing market expectations of 2.2%.

Electricity prices surged 22% in November, but this was primarily influenced by the timing of government rebates; subsidies from federal and state governments reduced overall prices by 21.5% compared to a year earlier.

A significant focus is on the trimmed mean—a key measure of core inflation—which decreased to 3.2% annually from 3.5%, moving closer to the Reserve Bank of Australia’s target range of 2% to 3%.

Abhijit Surya, Australia and New Zealand economist for Capital Economics, noted that easing core inflation signals a reduction in underlying price pressures. Surya suggested that if these trends continue in the upcoming quarterly CPI report, it could bolster the RBA’s confidence in reaching its inflation goals.

Surya also indicated that the data heightens the potential for the RBA to initiate its easing cycle earlier than anticipated in May.

The RBA has maintained steady interest rates for over a year, deeming the current cash rate of 4.35% sufficient to control inflation while safeguarding employment. The labor market remains resilient, with new data showing a rebound in job vacancies for the November quarter, breaking a nine-quarter streak of declines.

Importantly, the central bank shifted to a dovish stance last month, responding to slow economic growth. A February rate cut would potentially facilitate an early election for the center-left Labor government, which must be held no later than May.

Treasurer Jim Chalmers expressed optimism regarding the easing of underlying inflation, praising the progress made.

The government intends to prepare a pre-election budget for March.

The November report also included price updates on various services previously excluded. Hairdressing and personal grooming prices rose by 5.6% year-on-year, but the overall services inflation rate remained steady at an annual 4.1%. Additionally, the rise in prices for building and renovating new homes was just 2.8% year-on-year, the lowest since July 2021, attributed to discounts offered by builders to stimulate sales.