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Why the latest inflation dip ‘keeps interest rate hike expectations alive’
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Why the latest inflation dip ‘keeps interest rate hike expectations alive’

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Some economists say a drop in Australian inflation has not eliminated the possibility of a rate hike in February.
The annual consumer price index (CPI) fell from 3.8 to 3.4 per cent in November, according to Australian Bureau of Statistics data released on Wednesday.
That was lower than the nominal figure of 3.6 percent that economists had predicted.
But the RBA is putting more emphasis on the trimmed average, or underlying inflation measure, after removing volatile items, which remain too high.
The trimmed average inflation fell from 3.3 percent to 3.2 percent, after rising 0.3 percent month-on-month. The figure is above the RBA’s target range of two to three percent, but in line with their November forecast.

Also crucial to the RBA deliberations will be the December quarter inflation report, due to be published on January 28 – days before the central bank’s board of governors meets on February 2 and 3.

AMP chief economist Shane Oliver says the RBA will be concerned about tougher issues, such as the cost of building a new home, which has “accelerated”.
“New home inflation was 2.8 percent higher than a year ago, up from 1.7 percent in October compared to a year ago,” he told SBS News.
“So that’s still a red flag with new-build home prices continuing to rise, so that will concern the RBA.”

He said that while market services have not increased, they remain too high at about 3 percent.

‘Still too high’: what does this mean for interest rates?

Richard Holden, Scientia professor of economics at UNSW Business School, said inflation data shows the cost of items has still risen, but growth has slowed somewhat.
“I think it tells us that inflation is still too high,” he told SBS News.
“The RBA will have to do something to get it under control. And today’s figures don’t change that.”

When asked if this points to a rate hike, Holden said this is still in the offing.

“They certainly could, and many economists are suggesting that rates should go up. So if you thought they would rise before this number, I wouldn’t change your mind,” he said.
Oliver, relieved by the decline, predicts a lull but admits “they’re not great numbers.”
‘They’re still too high. The Reserve Bank will still be nervous. She is keeping the prospect of a rate hike in February alive,” Oliver said.

He said December’s CPI figures will be a better predictor of the RBA’s meeting in February.

Treasurer Jim Chalmers welcomed the CPI data, which was better than economists had predicted. Source: MONKEY / Lucas Koch

Treasurer Jim Chalmers said while he understood Australians were still burdened by competitive costs, the CPI results were “very welcome and very encouraging”.

“We know households are still under pressure and that is why our responsible cost-of-living relief is so important,” he said in a statement.
“Inflation remains much lower than we inherited from the coalition, but still higher than we would like.”
Stephen Smith, partner at Deloitte Access Economics, emphasized that the new data carries “large margins of error.”
He said the RBA must be “cautious and prudent, rather than impulsive”, arguing that an increase in the cash rate would be “premature”.
“If the RBA feels it has no choice to raise rates, then it is a sad indictment of policymakers’ failure to address the root causes through reform.”
After his decision, central bank Governor Michele Bullock said it was unlikely there would be further rate cuts “in the near future.”

– With additional reporting by the Australian Associated Press.

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