CPI indicator detail is soft. Inflation is not a barrier to cuts

Taylor Nugent | Markets Research

Key points:

• Monthly CPI indicator rose to 2.3% from 2.1% y/y in October (NAB 2.3, Consensus 2.2)
• The annual trimmed mean measure fell to 3.2% from 3.5% (NAB 3.4%, no consensus)
• We tentatively revise down our Q4 trimmed mean forecast to 0.5% q/q from 0.6%, 2 tenths below the RBA’s November forecast.
• The inflation backdrop is meaningfully better than the RBA’s cautious November forecast
• Inflation is not a barrier to cuts and the risk of a February cut have increased further with today’s data. That said, the only modestly restrictive starting point and the resilient labour market provide little urgency.

Detail:

In our preview we highlighted international travel prices and new dwelling costs as key to the trimmed mean outcome in Q4. Both of these surprised to the low side and point to slightly lower outcome for Q4 trimmed mean of 0.5% q/q (compared with our previous forecast of 0.6% q/q). We will finalise our Q4 forecast in a full Q4 CPI preview shortly. International travel prices tend to be volatile, but of more forward-looking importance was the sharp 0.6% m/m fall in new dwelling costs and a substantial moderation in insurance inflation.

Today’s data confirms that the inflation outlook is more benign than the RBA’s November outlook, and points to an even better Q4 print than the ‘modest downside risk’ characterised in the December board meeting minutes. While the RBA’s inflation forecasts will be revised lower in February, they will also need to revise their unemployment track lower. The labour market is near balance, but it is not cooling the way the RBA expected and indicators of labour demand, including vacancies data today, have stabilised at reasonably healthy levels. Inflation is not a barrier to cuts, but conditions in the labour market are not creating much urgency while the RBA’s forecasts for an acceleration in activity growth remain intact.

Detail:

Elevated insurance inflation had been one driver of stickiness in services inflation, in large part reflecting catch-up to earlier underlying cost pressures through car and dwelling replacement and repair costs. Insurance inflation moderated to just 1.1% q/q (1.5% seasonally adjusted, its lowest since Q2 2022), suggesting that those pressures are fading. Other services inflation indicators in November were mixed.

New Dwelling prices is the largest single component of the CPI and fell 0.6% m/m. It is difficult to overstate the importance of the turn in New Dwelling Inflation to the outlook. After hovering near 5% in annualised terms, prices over the last few months had been flat. This alone would take a tenth of quarterly trimmed mean CPI. While labour remains a constraint for many builders and pipelines of work remain elevated, demand has cooled, pockets of capacity in parts of the supply chain have emerged, and input cost inflation has moderated substantially. That combination had seen prices stabilise at elevated levels, but the ABS notes builders offering discounts and promotional offers to entice business in November, pointing to the risk of sustained falls in prices in this category.

Electricity prices increased sharply, as expected, up 22% m/m as the impact of catch-up payments which drove the fall in October unwound and the first WA instalment was exhausted. Electricity is still down 22% y/y and will subtract from Q4 CPI. On our calculations, excluding electricity headline monthly inflation would be 2.9% y/y (rather than 2.3%) and the measure excluding fuel, fruit & veg, and travel, would be 3.5% y/y (rather than 2.8%).

Elsewhere, rents inflation reverted to 0.6% m/m in November after a decline last month driven by higher rent assistance. That increase in rent assistance subtracts 10bp from trimmed mean in Q4. Looking forward, advertised rents inflation has slowed to around 0.2% m/m, which will be flowing into more meaningful moderation in underlying rents growth from late 2025.

Chart 1: Electricity subsidies have a large effect on CPI

Chart 2: Services inflation and non-tradables inflation

Chart 2: Key services categories measured in November

Chart 4: Preliminary Q4 contributions 

Chart 5: New Dwelling inflation has slowed sharply 

Chart 6: Rent assistance drives a soft Q4 rents outcome,. Rents inflation will be elevated again in H1 2025 ahead of more durable slowing given cooler recent outcomes in advertised rents

Chart 7: Inflation by category

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