Core inflation approaches RBA target range, stoking hopes for rate cut

Headline CPI rose 0.2 per cent in the December quarter and 2.4 per cent annually, according to the latest data from the Australian Bureau of Statistics (ABS).

Annual underlying inflation has fallen to 3.2 per cent, just outside the Reserve Bank of Australia’s 2 to 3 per cent target range.

BDO Economics partner Anders Magnusson said while the door now appears open for the RBA to announce its first rate cut in four years, the broader global economy still presents significant inflationary risks for monetary policy.

“Taking a broader focus, looming global uncertainties could thwart optimistic domestic trends. Australia's dependence on resource exports and crucial trade relationships, especially with China, heightens the stakes.

“The new Trump administration's tariff policies could lead to increased import costs and supply chain disruptions, and there are fears these factors could offset positive developments in Australia’s economy,” he said.

Falling fuel and electricity prices and moderating price rises for new dwellings were key factors driving headline CPI to fall in the December quarter, according to the ABS. This was partially influenced by government policies implemented to bring down the cost of living.

“The 2024-25 Commonwealth Energy Bill Relief Fund rebates led to a large fall in electricity prices this quarter,” Michelle Marquardt, ABS head of prices statistics, said.

"The overall economic picture suggests a gradual stabilisation of prices, with government interventions like energy rebates and rent assistance playing a significant role in managing household costs," RSM Australia economist Devika Shivadekar said.

Non-discretionary inflation was the lowest it has been since 2021, at 1.8 per cent for the December quarter. This was largely driven by energy prices, as well as lower inflation for food and non-alcoholic beverages.

“These results feel like a turning point for the Australian economy and a rate cut now seems more likely to occur in the first half of this year,” Luke Fossett, general manager at GoCardless Australia and New Zealand, said.

“When consumers catch a break, that means more discretionary spending, so businesses catch a break too.”

BDO’s Anders Magnusson said the RBA faces a tough choice amid mixed signals and global uncertainties.

Despite promising CPI statistics, Australia’s resilient labour market, robust government spending and falling dollar could delay rate cuts. International uncertainty could also make the RBA take a more cautious approach in their interest rate decisions, he added.

“While there are positive indicators domestically, the broader international landscape presents significant inflationary risks to monetary policy,” Magnusson said.