Annual headline inflation remained steady at 2.5% in January, but underlying inflation, which is the measure tracked by the Reserve Bank of Australia when determining rate cuts, increased slightly.

Underlying inflation, also known as trimmed mean inflation because it trims volatile price movements, increased 0.1 of a percentage point to 2.8% in January, mostly due to electricity prices being trimmed out of the figure, according to figures released by the Australian Bureau of Statistics on Wednesday.

Food (up 3.3%), housing (up 2.1%) and alcohol and tobacco (up 6.4%) were the main drivers of price increases, particularly fresh fruit, which the ABS noted costs 12.3% more than this time last year.

Electricity prices, on the other hand, are down 11.5% over the past year, and the cost of fuel has also decreased 1.9%.

 

The latest inflation figures were in line with analyst expectations. CBA forecasts expected headline inflation to increase to 2.7% year-on-year and trimmed mean inflation to come in at 2.8%.

Last week, the Reserve Bank of Australia lowered the official interest rate from 4.35% to 4.1%, although governor Michele Bullock watered down expectations of further rapid successive rate cuts.

“It’s clear that higher interest rates have been working as anticipated, restricting economic activity and putting downward pressure on inflation. The Board judges it’s time to reduce a little bit of that restrictiveness, but we cannot declare victory on inflation just yet. It is not good enough for inflation to be back in the target range temporarily. The Board needs to be confident that is returning to the target range sustainably,” said Bullock shortly after the rate cuts were announced.

Retailers immediately reacted to the RBA’s decision to cut rates. “The Reserve Bank’s decision to cut the cash rate to 4.10% is a step in the right direction. This should provide modest relief to households, helping restore spending confidence and set a more optimistic tone for 2025,” said Australian Retailers Association (ARA) Chief Industry Affairs Officer, Fleur Brown.

Michelle Bullock, Governor of the Reserve Bank of Australia (Image: RBA)

Michelle Bullock, Governor of the Reserve Bank of Australia (Image: RBA)

“While a lower cash rate will help ease some of the strain on businesses and consumers, we need to see this momentum continue. Retail represents almost one fifth of our gross domestic product – we can’t have an economic recovery without a retail recovery.”

Analysts are now cautioning against expecting immediate further rate cuts. “The biggest concern for policymakers and investors alike remains the view that disinflation may stall, hence the RBA’s hawkish stance despite cutting rates,” said eToro market analyst Josh Gilbert, according to 9News.

“For now, another cut isn’t likely in April, particularly with the ongoing strength in the labour market.”

Net employment in Australia rose 44,300 in January, following a 60,000 increase in December. However, the unemployment rate climbed in January to 4.1% from 4%, as the workforce expanded more than the number of jobs added.