The Reserve Bank of Australia (RBA) appears unlikely to lower interest rates in 2024, despite annual inflation falling to its lowest level in over three years. October’s Consumer Price Index (CPI) data, released by the Australian Bureau of Statistics (ABS), indicates a steady inflation rate of 2.1 per cent.
Inflation at Lowest Level Since 2021
Australia’s inflation rate of 2.1 per cent in October marks the lowest annual increase since July 2021. Falling electricity prices and government subsidies contributed to this drop.
“Electricity prices were down a whopping 35.6 per cent year-on-year in October,” noted Marcel Thieliant of Capital Economics. The decline stems from $300 rebates provided by the federal government, which were supplemented by some states.
Petrol prices also eased, further lowering the CPI. However, rising costs in other areas, such as food and recreational activities, offset these declines.
Underlying Inflation Still Above Target
Despite the headline figure meeting the RBA’s 2 to 3 per cent target range, underlying inflation remains a concern. The trimmed mean inflation rate, a key measure for the RBA, rose to 3.5 per cent in October.
“The falls in electricity and fuel had a significant impact on the annual CPI measure this month,” said ABS head of prices statistics Michelle Marquardt.
However, she added that trimmed mean inflation, which excludes volatile price changes, offers better insight into inflation trends.
Key Sectors Driving Inflation
While subsidies eased electricity prices, other sectors saw price increases.
- Food prices: Fruit and vegetable costs rose 8.5 per cent annually due to limited supply of avocados, berries, and vegetables like cucumber and broccoli.
- Housing costs: Rents climbed 6.7 per cent over the year, driven by a shortage of rental properties.
- Construction costs: Building a new home became 4.2 per cent more expensive annually, despite a slowdown in demand.
These factors kept underlying inflation above the RBA’s target range.
RBA’s Stance on Interest Rates
Economists widely predict that the RBA will not lower interest rates until at least mid-2025. The cash rate currently sits at 4.35 per cent, the highest level in a decade.
The RBA has stated it needs sustained evidence of inflation stabilising within the 2 to 3 per cent range before considering rate cuts.
“We’re comfortable with our forecast that the bank will only cut interest rates in the second quarter of next year,” said Marcel Thieliant of Capital Economics.
Minutes from the RBA’s last meeting revealed it is unlikely to cut rates before May 2025.
Election and Economic Implications
The ongoing high interest rates could become a significant issue in the upcoming federal election. Voters have expressed dissatisfaction with the Albanese government’s handling of cost-of-living pressures.
Shadow Treasurer Angus Taylor criticised the government, stating, “Prices for a typical working family have increased by 18 per cent during Labor’s time in office.”
Temporary Impact of Subsidies
Federal and state electricity rebates have temporarily eased inflation. However, RBA Governor Michele Bullock warned these measures are short-lived.
“The decline in headline inflation will be short-lived due to the temporary nature of the subsidies,” Bullock said.
When subsidies expire next year, headline inflation is expected to rise to 3.7 per cent.
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Mixed Signals in Inflation Trends
Economists remain divided on the timing of the next rate cut.
JP Morgan’s Tom Kennedy predicts an earlier cut, possibly in February. He pointed to the significant price declines in several categories.
“Roughly half of the reported subgroups posted outright price declines in October,” Kennedy noted.
Others, including Westpac and NAB, forecast a cut in May, citing resilience in the jobs market and ongoing inflationary pressures.
Conclusion
October’s inflation data offers mixed signals for the economy. While headline inflation met the RBA’s target, underlying inflation remains stubbornly high. Analysts believe interest rate cuts are unlikely until mid-2025, as the RBA seeks more consistent signs of inflation stabilising.
The federal government faces increasing pressure to address cost-of-living concerns ahead of the election, while businesses and households await clearer signals on monetary policy changes.
