Disinflation may be ‘running apace’, but RBA still faces tough rate call

The RBA will be confronted with a complex decision on when to begin monetary policy easing, with stubborn macro data complicating the disinflationary trend, market experts warn. 

The monthly consumer price index (CPI) indicator rose 2.3 per cent in the 12 months to November 2024, up from a 2.1 per cent rise in October, according to the latest data from the Australian Bureau of Statistics (ABS).

Meanwhile, annual trimmed mean inflation - which remains higher than CPI inflation as it removed large price falls for electricity and automotive fuel - was 3.2 per cent in November, down from 3.5 per cent in October.

Working in its favour, the month of November saw decent price falls in garments, new dwelling purchases by owner-occupiers, cleaning and maintenance products, and holiday travel - both domestic and international.

For many market experts, like State Street's Krishna Bhimavarapu, the CPI reading on Wednesday is kicking 2025 off with some good news.

“The annual trimmed mean (3.2 per cent) continued moving towards the RBA’s target band, and on a more encouraging side, inflation in the new dwellings category was the weakest since mid-2021,” Bhimavarapu said on Wednesday.

“We can now confidently say that disinflation is running apace in Australia.”

Similarly, AMP’s Diana Mousina explained that components of the new data show a “slightly better” profile for the December quarter trimmed mean inflation figures, which will be key for the Reserve Bank of Australia’s next meeting in February.

“There has been some good progress in slowing services prices, especially for insurance, travel, and takeaway and restaurant meals. While rents are still elevated, they look to have peaked,” Mousina said.

According to the deputy economist, there are now more items with inflation running below 2 per cent than there are items running above 3 per cent.

As such, AMP has pencilled in for headline inflation to read at 0.3 per cent for the December quarter, and 0.6 per cent - or 3.3 per cent year-on-year - for the trimmed mean, below the RBA’s own forecast of 3.4 per cent.

And while the labour force continues to hold up well, which could argue against a near-term rate cut, AMP suspects that the strength in the labour market won’t be a barrier for the RBA to cut interest rates in the near-term given that wages growth is slowing.

“If the December quarter inflation data comes in close to our forecasts then a February 0.25 per cent rate cut is likely … we expect the RBA to cut interest rates by a total of 0.75 per cent this year,” Mousina concluded.

HSBC chief economist Paul Bloxham said the latest CPI indicator - coupled with the ABS’ latest job vacancy figures, which rose by 4.2 per cent during the December quarter - suggests that the economy continues to gradually dis-inflate, alongside a jobs market that remains strong.

And while the headline CPI print was slightly stronger than the market's expectation of 2.2 per cent, Bloxham, like other economists, homed in on the trimmed mean figures as the RBA’s central focus.

“There is also an important detail to highlight that means we need to be careful not to overinterpret this result,” he added.

“The trimmed mean in the monthly CPI indicator print is a trim of the y-o-y figures, not a trim of the monthly observations. This makes it different to the way the trimmed mean is calculated in the quarterly official CPI print.”

According to him, the trimmed mean indicator holds more "historical information”.

“Recall that back in June of 2024, the April and May CPI indicator figures were not a great guide to the final Q2 CPI and trimmed mean prints (which were published in late July 2024). On balance, this could mean trimmed mean inflation is falling a bit faster than this indicator suggests, but we are quite reluctant to put too much weight on the monthly CPI indicator data in general.”

For the central bank, Bloxham said that although core inflation may be heading to the RBA's target slightly faster than expected, a tightening jobs market could make it even harder to push core inflation sustainably back to target.

As such, HSBC’s central case is that the RBA does not cut until the second quarter of this year, and even considers there still being a 25 per cent chance of no cuts at all in 2025.

Does the RBA have the data it needs?

The RBA’s December minutes revealed a shift to a more dovish stance, with the central bank growing more confident that inflation is on track with its expectations.

Looking ahead, it acknowledged that inflation risks have diminished, but warned that uncertainties remain, particularly around consumer demand and global economic conditions.

But it also accepted that if the future flow of data continues to evolve in line with, or weaker than, its expectations, this would further increase its confidence that inflation was declining sustainably towards target.

“If that were to occur, members concluded that it would, in due course, be appropriate to begin relaxing the degree of monetary policy tightness. If the data came in stronger, that process could take longer. They noted that, in making this decision, they would be guided by how the evolving data shaped the economic outlook and the associated risks,” the RBA said.

VanEck’s head of investments, Russel Chesler, believes the figures that have come out this month are not conducive to a more bullish RBA.

“The market optimism towards an earlier rate cut was triggered by comments made by governor Bullock in early December, but it was predicated on the requirement that a rate cut was supported by data. We do not see current data as supportive of that,” Chesler highlighted.

He emphasised that the labour market in particular has proven resistant to disinflation measures, with the most recent data showing unemployment has actually decreased to 3.9 per cent.

“This is inhibiting further falls in inflation, as wages continue to be relatively elevated, despite recent moderation.”

This comes as Australians continue to demonstrate their spending power, based on November and December’s strong retail sales. In turn, VanEck’s forecast for the first RBA rate cut hasn't changed.

“While Australians are unlikely to get a rate cut post-Valentine’s Day, we think it will land later this year, with the RBA expected to err on the side of conservatism and opt for a shallow easing cycle of one-two standard cuts in 2025.

“This mirrors the Fed’s forecasted rate cut cycle for 2025, which would see the official cash rate in Australia and the Federal Funds Rate in the US looking very similar by the end of the year,” Chesler underscored.