Inflation eased in the December quarter to its lowest level in two years, all but guaranteeing the Reserve Bank keeps rates on hold when its board meets next week.
The consumer price index, a gauge of the prices individuals pay for a broad range of goods and services, eased to 4.1 per cent in the year to December, down from 5.4 per cent in the September quarter, the Australian Bureau of Statistics said on Wednesday.
While the result undershot the RBA’s forecasts for 4.5 per cent, continued cost pressures in the labour-intensive services sector mean that borrowers will likely have to wait until the second half of the year for rate cuts.
The result was lower than consensus forecasts of 4.3 per cent, reinforcing expectations that the cash rate will be kept on hold at 4.35 per cent at its first decision of 2024, scheduled for February 6.
The RBA has aggressively tightened monetary policy since May 2022 in an effort to cool the economy and bring inflation to a heel, after it surged during the pandemic on the back of supply chain disruptions, labour shortages and soaring aggregate demand.
Under the weight of 13 rate hikes and severe cost of living pressures, the economy has exhibited recent signs of slowing.
Fresh retail sales data, released on Tuesday, revealed spending over the usually popular Christmas sales period plunge by 2.7 per cent.
The jobs market has also loosened after the economy shed more than 65,000 jobs last month. Job vacancies have also fallen considerably from their peaks — indicating that demand for workers is softening.
But as inflation eased from its peak of 7.2 per cent in late 2022, the economy has still proven surprisingly resilient, buoying expectations that Australia is on track for a soft landing – that is a return of inflation to the RBA’s 2 to 3 per cent target without triggering a recession.
Updated forecasts released by the International Monetary Fund affirmed the view that the global economy is set to avoid a recession, however a spillover from China’s toxic property sector and rising geopolitical tensions in the Middle East could derail this trajectory, it warned.
Ahead of the updated inflation data, investors were expecting rate relief to commence in August, with bond markets fully priced for two rate cuts in 2024, which would lower the cash rate to 3.85 per cent by year’s end.