Brand-new inflation data has set up 2025 to be very interesting indeed. An election looms that the incumbent government could well lose, and the Reserve Bank looks on the fence about rate cuts. But then, on the day schools go back, boom: new figures show inflation has moderated quite a lot.
Headline inflation is down to 2.4%. That has tongues wagging in the financial sector: a rate cut is coming, so they wager.
“It’s on,” wrote Westpac’s numbers boss Luci Ellis.
“The RBA will be encouraged by today’s CPI data,” wrote Gareth Aird, Commonwealth Bank’s chief soothsayer on matters domestic.
Bank of Queensland’s head of markets analysis Peter Munckton concurred, while Harry Murphy Cruise, head of China and Australia economics at Moody’s Analytics, said, “A February rate cut is firmly on the agenda. But it’s no guarantee.”
The markets seem to agree. The Australian dollar dropped the moment the inflation data came out. Lower official rates usually lead to a weaker currency, so the forex market updated rapidly when the new data emerged.
As the next chart shows, the official quarterly consumer price index and the more volatile monthly index agree: headline inflation has been around 2.4% over the past year.
That’s back to normal. And so are some other measures. The trimmed mean and weighted median are falling fast, while CPI excluding tobacco is modest indeed, as the next chart shows.
That’s not all. Discretionary items are rising faster than non-discretionary, for example, for the first time since 2020.
The rapid price rises in non-discretionary items — things we have no choice but to buy — have driven the Australian people mad. There has been nowhere to hide from this wave of inflation. That anger has made things very hard for political incumbents around the world, who have been buffeted by fury and often dumped as soon as possible.
The Australian government will be hoping the public is actually feeling the current normalisation of inflation — that it isn’t merely a statistical phenomenon but people are sighing with relief.
I don’t think we will.
I’ve previously argued in these pages that people have much longer memories than statisticians. While inflation is measured over 12 months precisely, nothing stops people from remembering where prices were two or even five years ago. The current fall in price changes does not change those calculations much. What we are seeing now is not a fall in prices. Prices are still rising, just more slowly than before. That’s very much not a three-cheers-for-the-government-type scenario.
What people might notice, however, is a rate cut. One quarter-percentage-point cut in the official interest rate could deliver $100 a month in disposable income to households with the average new mortgage in Victoria ($642,000) and more to households with the average new mortgage in NSW.
So the eyes of the nation turn to the RBA, which is meeting on February 17 or 18 — later than usual, thanks to the new meeting schedule.
The government will likely bring down a pre-election budget not long after. The election is rumoured for May 17 or 24, which is basically as late as it can be. The government will want the sting of high inflation to have gone as far into the past as possible, and might also like to leave itself open for a second rate cut. Rates will be considered again when the RBA board meets on April 1 and May 20.
Could Prime Minister Anthony Albanese and Treasurer Jim Chalmers get two rate cuts before we go to the polls? Perhaps. Much depends on where inflation goes next.
I will be keeping a particular eye on oil prices — weaker oil prices will make petrol cheaper, and cheap petrol does double duty. It makes for happy voters and the RBA keener to cut. That could mean a much more forgiving populace on election day.
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