Underlying inflation for the December quarter has eased to 3.2 per cent, the lowest rate since late 2021, according to the Australian Bureau of Statistics (ABS). It was at 3.6 per cent in the previous quarter.
Meanwhile, the Consumer Price Index (CPI) rose by a modest 0.2 per cent in the December quarter and 2.4 per cent annually.
ABS head of price statistics Michelle Marquardt said it is one of the lowest quarterly rises recorded in the last few years.
"December quarter's rise was the same as the 0.2 per cent increase in the September 2024 quarter," she said on Wednesday.
"These rises were the lowest recorded since the June 2020 quarter when the CPI fell during the COVID-19 outbreak when childcare was free.
"Annually, the December quarter's rise of 2.4 per cent was down from 2.8 per cent in the September quarter."
The Consumer Price Index rose 0.2 per cent in the December 2024 quarter and 2.4 per cent annually, according to the Australian Bureau of Statistics. Source: SBS News
The CPI is an important measure of inflation, reflecting the percentage change in the cost of goods and services typically bought by households.
The ABS gathers data from businesses to monitor price fluctuations, providing insight into household spending on essentials like groceries, housing, and public transport.
However, the CPI is only based on data from Australia's capital cities and does not account for price changes in regional or remote areas.
The Reserve Bank of Australia (RBA) uses the trimmed mean — which removes the biggest price swings — to measure underlying inflation. It grew 0.5 per cent in the December quarter, the ABS said.
"The trimmed mean excluded price falls in both Electricity and Automotive fuel this quarter, alongside other large price rises and falls. As a result, trimmed mean annual inflation of 3.2 per cent was higher than CPI inflation of 2.4 per cent," Marquardt said.
Could we see a rate cut?
Betashares chief economist David Bassenese said the latest figures were promising for a rate cut.
"There’s no question the economy deserves an interest rate cut to ease the restrictiveness of current policy settings," he said.
"I anticipate the Reserve Bank will welcome these inflation results and reward hard-pressed households and mortgage holders with an interest rate cut at the February 17-18 policy meeting,
"My expectation is the RBA will follow up with two further rate cuts this year, not immediately but likely following confirmation of further declines in inflation following the next few quarterly CPI reports."
"There’s now a good chance trimmed mean "underlying" inflation could fall back to with the RBA’s 2-3 per cent inflation target band by June, rather than the RBA’s current expectation of December," he said.
RSM Australia economist Devika Shivadekar said the RBA may remain cautious and not reduce the cash rate.
"A rate cut is still on the table for the February RBA policy meeting, with the likelihood evenly split but skewing slightly towards a hold in our opinion," she said.
"The RBA would probably yet again err on the side of caution and insist on ensuring a 'sustainable' decline in trimmed mean inflation, preferring to wait for that one additional data point for confirmation. However, the broader disinflationary trend is unmistakable."
What are the 'big four' saying about rate cuts?
Following the latest figures, Westpac is predicting a rate cut in February, joining the Commonwealth Bank (CBA) and ANZ in anticipating a cash rate reduction when the RBA next meets.
But NAB disagrees and has predicted Australians will have to wait for the third RBA meeting in May before the cash rate target is changed.
The big four also have varying predictions for the number of rate cuts in 2025.
ANZ is the most cautious, expecting two cuts, while CBA and Westpac forecast four. NAB is predicting the most, with five cuts.
Electricity and fuel prices fall in quarterly CPI
The ABS attributes the dip in quarterly CPI largely to electricity and fuel prices falling.
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"Electricity prices fell 9.9 per cent in the December quarter and 25.2 per cent in the past 12 months," it said in a statement.
"The introduction of the 2024-25 Commonwealth Energy Bill Relief Fund rebates from July 2024 were the main driver for the fall in electricity prices this quarter.
"Automotive fuel prices fell 7.9 per cent over the 12 months to the December quarter, reflecting lower global oil prices over the year."
Drop in fruit and vegetable prices
Food prices increased by 3.0 per cent in the 12 months leading up to the December quarter, down from 3.3 per cent in the September quarter.
Price hikes slowed across most food categories, except for meat and seafood, where lamb prices surged by 17.3 per cent over the year.
While fruit and vegetable prices were still 6.3 per cent higher compared to the same time last year, they dropped by 3.3 per cent in the latest quarter.
"Supply continues to improve with prices falling in recent months for tomatoes, cucumbers, beans, mangoes and strawberries due to favourable growing conditions," the ABS said.
Alcohol, tobacco and travel prices increase
Tobacco prices rose 5.8 per cent over the quarter, while alcoholic beverages recorded a narrower increase of 0.7 per cent, driven by beer at 1.2 per cent and spirits at 1.1 per cent.
Over the past twelve months tobacco is up 12.2 per cent, and beer 4.3 per cent.
Recreation and culture also witnessed an increase in the December quarter of 1.5 per cent, which the ABS attributes to the holiday period.
"Domestic holiday travel and accommodation (5.7 per cent) was the main contributor to the rise due to an increase in travel demand during the school holiday period driving up prices for airfares and accommodation," it said.
'Encouraging signs', Treasurer says
Treasurer Jim Chalmers has described the latest figures as encouraging while acknowledging there have been tough financial pressures for Australian households.
"We know the fight against inflation is not yet over but these are incredibly encouraging signs. We are getting on top of this challenge in our economy. The worst of the inflation challenge is now well and truly behind us," he said on Wednesday.
"We still have people under pretty extreme pressure but the sorts of things that we are preparing for and planning for are now unfolding. This substantial and now sustained moderation is a pretty remarkable achievement for which all Australians can share in."
How does the RBA set the cash rate?
The RBA closely tracks inflation, which is a key factor in its decisions to raise or lower interest rates.
Australia's official inflation target is set at 2 to 3 per cent, and the RBA has been working to reduce inflation by raising interest rates.
After increasing rates to 4.35 per cent in 2023, the RBA has kept the rate steady and will next convene in February, the earliest date Australia could see a reduction in the cash rate target.
RBA governor Michele Bullock has described taming inflation as a "balancing act".
"With inflation coming down and employment growing, we think we remain on the narrow path," she said after RBA's December meeting.
— With additional reporting by AAP.
