New inflation figures have reinforced the Reserve Bank of Australia’s decision to cut official interest rates at its last board meeting.
Monthly Consumer Price data from the Bureau of Statistics shows that over the 12 months to the end of January 2025, inflation was 2.5% in Australia.
The figure was unchanged from the previous month, but came in below market expectations.
The outcome also paves the way for further RBA rate cuts this year, possibly as early as May.
The details
The Australian Bureau of Statistics says its monthly CPI (Consumer Price Index) indicator rose 2.5% in the 12 months to the end of January 2025.
The data shows a sharp rise in electricity prices as the impact of large state and federal government cost-of-living energy bill relief schemes came to an end.
According to the ABS, electricity prices fell 11.5% in the 12 months to January, following a large 17.9% fall in the year to December 2024.
“The annual fall in electricity prices continued to soften as prices rose in January 2025 (+8.9%) as some households in Queensland experienced increases in their electricity bills, having used up the $1,000 State government rebate,” the ABS says in the notes accompanying its data release.
However, CommSec says the rise in electricity costs was offset by a slowdown in housing costs, in what it says is “an outcome that should reassure policymakers that inflation is heading in the right direction.”
Housing costs easing
The ABS says rental prices increased 5.8% in the 12 months to the end of January, down from the 6.2% growth in the year to December 2024.
The ABS puts this easing in rental price growth down to increased vacancy rates across most capital cities.
However, rental growth still remains high in historical terms, with growth only averaging about 2% during the 2010s.
The data also shows new dwelling prices, the category which includes new builds and major renovations, rose just 2.0% in the 12 months to January.
“Price growth has eased in recent months, resulting in the weakest annual rise since June 2021,” the ABS says.
“This is due to project home builders offering incentives and promotional offers to entice business.”
Trimmed mean or core inflation
The Reserve Bank of Australia is tasked with keeping annual inflation within a 2-3% target band and using the main tool at its disposal - the movement of interest rates - to achieve this.
While CPI or “headline” inflation has been within that target band since August last year, the RBA has made clear it is concentrating on the trimmed mean (or core) inflation measure, so it can “look past” the impact of temporary cost-of-living relief to get a better picture of the forces at work in the Australian economy.
On an annualised basis, trimmed mean inflation only dropped back into the RBA’s target band in December 2024, coming in at 2.7%, while the January 2025 figure was slightly higher at 2.8%.
However, AMP Deputy Chief Economist Diana Mousina says that the latest inflation data contains quite a lot of positive news.
“Despite this big increase to electricity costs in one month, we've still managed to get annual inflation basically at an unchanged pace of 2.5%,” she says.
“I think the Reserve Bank would be taking today's figures as quite good news in terms of their own outlook for inflation.”
Ms Mousina points to the relatively volatile nature of monthly inflation figures, and believes the RBA will wait to see the more complete quarterly inflation figures for January, February and March 2025 (to be released at the end of April) before considering any more rate cuts.
Nevertheless, she believes the latest monthly data shows that inflation in the cost of services (everything from haircuts to home building) is continuing to trend down.
When you take the rise in electricity prices out of the equation, AMP’s Diana Mousina says that basically, “every other category rose by a little bit less than expected when I looked at the major headline outcomes, particularly in the housing components of rent and new dwelling construction costs.
“That has been a very sticky part of the inflation basket, and those prices actually fell over the month of January.
“I think that the path for trimmed mean inflation or core inflation, whatever you want to call it, is still to the downside.
“That's the key for the Reserve Bank,” she says.
“We (AMP) think that by the middle of this year, we will see core or trimmed mean inflation running well below 3%, so the top of the RBA's target band.
“That should be considered as very positive news for both Australian households and for the Reserve Bank to keep on giving some further rate cuts this year.”