Australia’s Inflation Dampening, Hits 2-Year Low

Shoppers looks through the bargain bins at the David Jones flagship store in Sydney, Australia, on Dec. 26, 2023. (Jenny Evans/Getty Images)

Australia’s inflation has dropped again in the three months to December 2023 as price growth for most goods and services moderated.

According to the latest data from the Australian Bureau of Statistics (ABS), the annual consumer price index (CPI) grew by 4.1 percent in the December 2023 quarter, down from 5.4 percent in the September quarter and six percent in the June quarter.

The figure marks the fourth consecutive drop in the inflation rate and is well below the peak of 7.8 percent in the December 2022 quarter.

In terms of quarter growth, the growth in CPI dropped from 1.2 percent in the September quarter to 0.6 percent in the December quarter, the lowest quarterly result since the March 2021 quarter.

Potential Implications of December Inflation Data

With the latest inflation data, some economists believe the Reserve Bank of Australia (RBA) will keep the interest rate unchanged in February.

Catherine Birch, a senior economist at ANZ Bank, said the headline inflation rate (4.1 percent) and trimmed mean inflation rate (4.2 percent) were below the RBA’s forecast of 4.5 percent for each.

“Other data showing softening activity and price growth also support the case for a hold in February and, ultimately, lower interest rates this year,” she said.

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“Our base case remains that the cash rate has peaked at 4.35 percent, but that cuts won’t begin until late this year.”

Likewise, Luci Ellis, the chief economist at Westpac Bank, predicted that the cash rate would not rise any further and that inflation would return to the 2 to 3 percent target band within the RBA’s desired time frame.

Goods and Services Inflation Dropped Significantly

Goods inflation decreased from 4.9 percent to 3.8 percent, while services inflation fell from 5.8 percent to 4.6 percent during the period.

Housing (up 1 percent), alcohol and tobacco (up 2.8 percent), insurance and financial services (up 1.7 per cent), and food and non-alcoholic beverages (up 0.5 percent) were the main contributors to inflation in the past three months.

The rise in the housing category was driven by price growth in new dwellings purchased by owner-occupiers (up 1.5 percent), rents (up 0.9 percent), and utilities (up 0.6 percent).

“Higher labour and material costs contributed to price rises this quarter for construction of new dwellings,” ABS head of prices statistics Michelle Marquardt said.

The ABS also said the slight rent increase was due to the federal government’s changes to the Commonwealth Rent Assistance program. Without it, rent would have climbed to 2.2 percent in the previous quarter.

Similarly, without the Energy Bill Relief rebates, electricity prices would have increased 17.6 percent in the past year instead of the 6.9 percent recorded by the ABS.

Meanwhile, insurance premiums for motor vehicles, houses, and home contents surged by 16.2 percent in the 12 months, the most significant increase since March 2001.

While food and non-alcoholic beverage prices still rose in the December quarter, they reported the smallest growth since September 2021.

“The rise was driven by meals out and takeaway foods (up 0.9 percent), food products not elsewhere classified (up 1.9 percent), and bread and cereal products (up 1.9 percent),” the ABS said.