Underlying inflation has fallen to its lowest rate in three years in the past quarter, raising hopes for interest rate cuts. But factors such as the falling Australian dollar which now hovers around the 0.62 mark to the US dollar, compared to its 0.69 position as recently as September, is pressuring the economy.
Annual trimmed mean inflation, the RBA’s preferred measure of underlying inflation, fell to 3.2% in December down from 3.6% in the quarter ending September, the Australian Bureau of Statistics said on Wednesday. The headline figure for inflation for the December quarter was 2.4%, down from 2.8% in the September quarter.
The latest figures have raised expectations among analysts that the Reserve Bank of Australia will cut its rates at its next meeting on February 18, ahead of the general elections.
“The slightly lower than expected Q4 inflation data opens the door for a February RBA rate cut and validates our forecast for three rate cuts in 2025,” said Bendigo Bank’s Chief Economist David Robertson.
“Both headline and core inflation were 0.1% lower than consensus (at 0.2% and 0.5% respectively) making the six-month annualised inflation rate safely with the RBA target band. Even more compelling for core inflation was the monthly indicator for December where the Trimmed Mean fell to 2.7% suggesting the moderating trend for Q1 2025 will continue,” he said noting that if the RBA does cut rates in February, a second cut could follow in May with the economy on its current path.
While the trimmed mean is still higher than the RBA’s target range of 2-3%, the inflation rate seems to be on the path to getting within that range.
The official cash rate has been at 4.35% since November 2023, while the last rate cut occurred in November 2020.
Inflation in the cost of building a new home slowed to 2.9 per cent in December, down from 20.7 per cent in September 2022. Annual rent inflation also slowed to 6.4 per cent in December.
The Australian dollar has been under enormous pressure with the uncertain conditions in the China market and President Donald Trump’s trade policies weighing on it.
As a result, retailers and small businesses are under pressure since most of their imports are directly affected due to a strong US dollar. Other costs including those of manufacturing and marketing activities such as the use of Google Ads to target customers are also charged in US dollars making their overall operational costs rise.
