Inflation steady but rate cuts remain distant

Scott Kuru November 27, 2024 4 min read

KEY POINTS

Inflation for the year to October 2024 was 2.1%, within the RBA’s 2-3% target range, but underlying inflation climbed to 3.5%
Despite the headline rate, one leading economist predicts no interest rate cuts until at least May next year
A global trade war sparked by the Trump administration’s tariffs on imported goods into the US could push any potential rate cuts even further back

Data from the Australian Bureau of Statistics shows the monthly Consumer Price Index or inflation indicator in the year to October 2024 was 2.1%.

The figure was unchanged from September but well down on the 2.7% recorded in the year to August.

It was also below market predictions of 2.3%.

While headline inflation has been back in the Reserve Bank of Australia’s mandated target band of 2-3% for three months now, financial markets and most economists believe the RBA is unlikely to start cutting the cash rate - currently at a 13-year high of 4.35% - until at least May next year.

The details

Inflation in Australia was 2.1% in the 12 months to the end of October 2024.

The Bureau of Statistics says the most significant price rises were in the Food and non-alcoholic beverages category (+3.3%), Recreation and culture (+4.3%), and Alcohol and tobacco (+6.0%).

Partly offsetting the annual increases in other categories was Transport (-2.8%).

At face value, an annualised monthly inflation number of 2.1% should be cause for celebration.

Given that monthly inflation peaked at 8.4% in December 2022, the latest data seems to be proof that the RBA’s sustained campaign of interest rate hikes has had the desired effect in slowing the Australian economy and returning inflation to target.

However, economists such as Sean Langcake from Oxford Economics say the headline inflation rate is still being pulled lower by the impact of consumer electricity subsidies offered by the Federal and several state governments.

“There's still a lot of subsidies, especially around electricity prices, that have really dragged inflation down in this print and the last one,” he says.

Indeed, the ABS figures show that consumer electricity prices actually fell a whopping 35.6% in the year to October 2024.

Mr Langcake also points to lower fuel prices (down 11.5% in the year to October 2024), which he says “the RBA would typically look to ignore as they have no control over that.

“I think the thing that would be worrying them a little bit.. is the fact that the core inflation measure ticked back up a little bit.”

Core inflation - which takes out some of the more volatile numbers that go into CPI calculations - rose from 3.2% in September to 3.5% in October on the trimmed mean measure - the Reserve Bank’s preferred way of gauging inflation in Australia.

The ABS figures also show rental inflation remaining very high at 6.7% in the year to October 2024, up slightly from 6.6% recorded in the year to September.

As to what all that means for mortgage holders hoping for interest rate cuts sooner rather than later, Sean Langcake says he thinks “we're going to have to be quite patient, waiting until well into next year before they (the RBA) look to ease rates.”

Mr Langcake says Oxford Economics doesn’t expect any RBA rate cuts until at least May next year, when the RBA will have had the benefit of seeing inflation data from two whole quarters.

“But those (inflation) prints are going to have to play out as expected, and there's always a chance of an upside surprise.

“At this stage, I think we're still on for May, but I think the risks are that the first cut comes later than that rather than sooner,” he told ABC News.

Financial markets and Donald Trump

It wasn’t so long ago that financial markets were pricing in several RBA rate cuts this year.

That’s well and truly blown out now, with current money market trading showing a negligible chance of an interest rate cut at the RBA’s December meeting.

It’s not until May next year when markets have fully priced in one full 0.25% cut, with a second fully priced in by December 2025.

However, an international trade war could set those expectations of 2 interest rate cuts next year back even further.

US President-elect Donald Trump has announced he will put a 25% tariff on goods from Mexico and Canada and an extra 10% tariff on goods from China as soon as he takes office in January next year.

As ANZ Bank’s Brian Martin and Daniel Hynes wrote in an update to clients, “the planned actions represent a short-term supply challenge for the US, with uncertain inflation implications.

“The US imports vehicles and machinery from Mexico, along with fruit and vegetables.

“Canada supplies oil, cars and petrol, while China mainly supplies electronics, machinery, toys and furniture.

“And there will be flow-on effects.”

Indeed, higher inflation in America - the world’s most powerful economy - as the result of more expensive imports could lead to another global inflation break-out.

So, if you are banking on the RBA to cut interest rates in Australia next year, the advice is to prepare to be disappointed.

Or, as high-profile business commentator Alan Kohler wrote this week:

“What we shouldn’t expect are rate cuts before next Easter, and possibly not before the 2025 (AFL) Grand Final.”