Australia’s core inflation eased by more than expected in the final three months of 2024, opening the door to an interest-rate cut as soon as next month and sending the currency lower.
The annual trimmed mean gauge of consumer prices, which shaves off volatile items, rose 3.2% in the three months through December, compared with an expected 3.3% gain, data from the Australian Bureau of Statistics showed Wednesday. On a quarterly basis, consumer prices rose 0.5% versus a forecast 0.6%.
The Reserve Bank, which aims for the midpoint of a 2%-3% CPI target, is focused on core inflation because government subsidies are suppressing headline prices. Trimmed mean CPI hasn’t been inside the band since the end of 2021.
The currency and the yield on policy sensitive three-year government bonds declined following the release. Stocks extended gains as money markets boosted bets on a February rate cut to almost 90%.
The result will buttress the RBA’s growing confidence that inflation is on track to return sustainably to target in a reasonable timeframe. At their last meeting in December 2024, policymakers pivoted to a more dovish stance and discussed scenarios in which rates might be lowered or remain at current restrictive levels.
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They assessed that either outcome was plausible and opted to hold rates at 4.35%, a 13-year high that has been in place since late 2023.
Since then, consumer spending and business conditions have picked up and the labor market remained strong — all pointing to the risk of persistent inflation pressures. The RBA is sensitive to the possibility that revived consumption and the strong jobs market may combine to frustrate efforts to bring core inflation down to target.
At the same time, Australia will soon be headed to the polls and economists fear that both sides of politics will be tempted to unleash major spending initiatives to try to sway what’s expected to be a tight election.
Chart: Bloomberg
