Australia’s consumer price inflation slightly increased from three-year lows in November, primarily driven by a sharp rise in electricity costs. However, the overall drop in core inflation metrics has strengthened arguments for a potential interest rate cut by the Reserve Bank of Australia (RBA) as soon as February.
According to the Australian Bureau of Statistics (ABS), the monthly consumer price index (CPI) saw a modest rise at an annual pace of 2.3% in November, up from 2.1% in October. This figure narrowly surpassed market expectations of a 2.2% increase. The surge in electricity prices, which jumped 22% for the month, was identified as a significant contributor to the overall rise. However, this spike was somewhat misleading, attributed mainly to the timing of government rebates.
Despite the monthly increase, year-over-year electricity prices were still 21.5% lower due to sustained federal and state government subsidies, which have mitigated some of the financial burdens on consumers.
More critical to the central bank’s policy considerations is the trimmed mean inflation—a key measure of core inflation—which dropped to an annual rate of 3.2% from 3.5% in October. This decline suggests a gradual easing of underlying price pressures, moving closer to the RBA’s target range of 2% to 3%.
Abhijit Surya, an economist specializing in Australia and New Zealand at Capital Economics, highlighted the importance of this downward trend in core inflation. “The good news is that measures of core inflation suggest that underlying price pressures are indeed easing in earnest,” he noted. If this trend is confirmed in the forthcoming quarterly CPI report, the RBA could gain increased confidence in meeting its inflation objectives, possibly prompting earlier monetary easing.
Surya added, “The upshot is that today’s data raise the risk that the RBA will begin its easing cycle earlier than May, as we’re currently predicting.”
The financial markets responded to the inflation data with a mix of caution and optimism. The Australian dollar slipped 0.34% to $0.6214, reflecting market sentiment leaning towards potential rate cuts. Meanwhile, three-year bond futures reversed earlier losses, climbing four ticks to 96.11. Market-based expectations for a rate cut have also shifted, with swaps now implying a 64% chance of a February cut, up from 50% prior to the inflation report.
The RBA has maintained a steady cash rate of 4.35% for over a year, a level deemed restrictive enough to manage inflation while safeguarding employment gains. This policy stance reflects the bank’s cautious approach to balancing inflation control with economic growth.
Interestingly, despite broader economic concerns, Australia’s labor market has shown unexpected resilience. The ABS also reported a rebound in job vacancies during the November quarter, marking the end of nine consecutive quarters of decline. This rebound suggests sustained demand for labor, which could support household spending and economic activity in the coming months.
The prospect of an interest rate cut has broader implications beyond monetary policy. An easing in February could provide a political boost for the centre-left Labor government, led by Prime Minister Anthony Albanese. With a general election due by May, a rate cut could offer the government more room to maneuver in the lead-up to a pre-election budget set for March.
Treasurer Jim Chalmers welcomed the signs of moderating inflation, stating, “We are very encouraged by the substantial and sustained progress we have made… The Reserve Bank will factor all of that in when it meets at the next occasion and subsequently throughout the year.”
The November inflation report also detailed price trends across various sectors. Notably, prices for hairdressing and personal grooming services increased by 5.6% year-over-year. However, the overall inflation rate for services remained flat at 4.1% annually, indicating stabilization in this segment.
In the housing sector, prices for building and renovating new homes rose by just 2.8% from a year ago—the lowest annual increase since July 2021. This slowdown is attributed to builders offering discounts to attract customers amid softer demand.
