Inflation freefall, what will it do to interest rates?
Inflation rates continue to fall towards the Reserve Bank of Australia’s (RBA) target of 2-3% following a significant drop in November’s annual figures last year. The inflation rate dropped to 4.3% in the year to November of 2023, falling further than the 8.4% figure at the end of 2022.
Attention is now on December’s monthly data, which will be released on 31 January. Managing director of Market Economics Stephen Koukoulas said if the month-on-month rise is 0.3%, annual inflation will be 3%, the RBA’s target.
“The inflation problem is over. The RBA was concerned about inflation and their subsequent tightening of interest rates has worked,” Koukoulas said. “If you hike interest rates aggressively and crunch the economy, then yes, it’s going to fall and it’s happened.”
The monthly Consumer Price Index (CPI) indicator rose 4.3% in the year to November last year according to the Australian Bureau of Statistics (ABS), the smallest annual increase since January 2022. This was down from October’s figure of 4.9%
One of the biggest reasons for these inflation figures was automotive fuel prices rising 2.3% in the 12 months to November 2023, down from 8.6% in the annual increase to October. It was as high as 19.7% in September.
Other contributors to the November annual increase were housing at +6.6%, food and non-alcoholic beverages at +4.6%, insurance and financial services at +8.8% and alcohol and tobacco at +6.4%.
"CPI inflation is often impacted by items with volatile price changes like automotive fuel, fruit and vegetables and holiday travel. It can be helpful to exclude these items from the headline CPI to provide a view of underlying inflation,” ABS head of price statistics Michelle Marquardt said.
“When excluding these volatile items from the monthly CPI indicator, the annual rise in November was 4.8%, lower than the annual rise of 5.1% in October.”
Housing and rent increased, the latter rising 7.1% in the 12 months to November with low vacancy rates and a tight rental market. Housing’s increase was up from the 6.1% annual increase in October as new dwelling prices rose 5.5%, reflecting higher material and labour costs.
“The increase in Commonwealth Rent Assistance has reduced out-of-pocket rent costs for eligible tenants since its introduction on September 20, 2023,” Marquardt said.
“Excluding these changes to rent assistance, rents would have increased 8.8% over the year to November 2023.”
Attention has now turned to the RBA avoiding a recession and a rise in unemployment rates.
“Now the debate has switched to can the RBA avoid a nasty recession, a weak economy and unemployment rising to above 5%. We will see in the coming months,” Koukoulas said.
“The way to do this is to start cutting interest rates – soon.”
This article is supplied by the Finance Brokers at Mulcahy & Co. To contact us about your next loan for any purpose, please visit
https://www.mulcahy.com.au/lending
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