The Australian Bureau of Statistics (ABS) launched the most recent – Client Worth Index, Australia – for the December-quarter 2024 immediately (January 29, 2025). The information confirmed that the inflation fee rose by simply 0.2 factors within the quarter and has fallen to 2.4 per cent on an annual foundation (down from 2.8 per cent). The inflation fee has been throughout the RBA’s inflation concentrating on vary for the final 6 months and with inflationary expectations falling, the RBA has no justification left for holding to its elevated rates of interest. Utilizing the RBA’s personal logic, rates of interest ought to now be reduce.
The abstract, seasonally-adjusted Client Worth Index outcomes for the December-quarter 2024 are as follows:
| Element | Quarter % | Annual % |
| All teams CPI | 0.2 (final 0.2) | 2.4 (final 2.8) |
| Trimmed imply sequence | 0.5 (0.8) | 3.2 (3.6) |
| Weighted median sequence | 0.5 (0.9) | 3.4 (3.7) |
The next Desk exhibits the charges of inflation for the most important elements of the CPI:
| Element | December-quarter % | Final 12 months % |
| All teams CPI | 0.2 | 2.4 |
| Meals and non-alcoholic drinks | 0.2 | 3.0 |
| Alcohol and tobacco | 2.4 | 6.2 |
| Clothes and footwear | 0.1 | 1.3 |
| Housing | -0.7 | 1.0 |
| Furnishings, family gear and companies | -0.2 | 1.5 |
| Well being | -0.2 | 4.0 |
| Transport | -0.7 | -1.5 |
| Communication | 0.5 | 0.0 |
| Recreation and tradition | 1.5 | 3.3 |
| Training | 0.0 | 6.5 |
| Insurance coverage and monetary companies | 0.8 | 5.4 |
The ABS Media Launch – CPI rises 0.2% within the December 2024 quarter – famous that:
The Client Worth Index (CPI) rose 0.2 per cent within the December 2024 quarter and a pair of.4 per cent yearly …
December quarter’s rise was the identical because the 0.2 per cent enhance within the September 2024 quarter. These rises have been the bottom recorded for the reason that June 2020 quarter when the CPI fell in the course of the COVID-19 outbreak when childcare was free … Yearly, the December quarter’s rise of two.4 per cent was down from 2.8 per cent within the September quarter …
The primary contributors to the quarterly rise of 0.2 per cent have been Recreation and tradition (+1.5 per cent) and Alcohol and tobacco (+2.4 per cent). These rises have been largely offset by falls in Housing (-0.7 per cent) and Transport (-0.7 per cent).
The quarterly progress in Recreation and tradition was pushed by Home vacation journey and lodging (+5.7 per cent). Greater costs for airfares and lodging coincided with increased journey demand in the course of the faculty holidays.
The rise in Alcohol and tobacco costs was principally pushed by Tobacco (+5.8 per cent) reflecting the 5.0 per cent annual tobacco excise enhance and biannual Common Weekly Strange Time Earnings based mostly indexation that utilized from 1 September 2024 …
The 2024-25 Commonwealth Power Invoice Aid Fund rebates led to a big fall in electrical energy costs this quarter …
Automotive gasoline costs fell 2.0 per cent this quarter, following a 6.7 per cent drop within the September 2024 quarter, reflecting decrease international oil costs.
Observations:
1. The annual inflation fee continues to say no as the principle drivers abate.
2. The primary drivers mirror worth gouging by airline firms in the course of the Summer season vacation interval and the choice by authorities to push up its tobacco excise (an administrative resolution) – neither reflecting any semblance of extra demand within the economic system.
3. The fiscal spending by authorities to offset the value gouging by electrical energy firms has clearly been an efficient anti-inflationary coverage, placing paid to the notion that to defeating a supply-side inflationary spiral requires fiscal austerity.
4. Additional proof of the constructive fiscal impact is the impact of the modifications in Commonwealth Rental Help, which has lowered the escalation in rental inflation.
5. Nonetheless, observe that the lease will increase have been being pushed by the RBA’s personal fee hikes as landlords in a good housing market have been passing on the upper borrowing prices – so the so-called inflation-fighting fee hikes have been a big pressure in driving inflation.
This graph exhibits that the general inflation fee peaked within the December-quarter 2022 and has been steadily declining ever since.
Nonetheless, rental inflation lagged the rise in total inflation in 2021 and reall solely took off after the RBA began mountain climbing rates of interest.
As soon as the RBA ended its present mountain climbing cycle, the rental inflation has stabilised and is now falling.
Developments in inflation
Over the 12 months to December the inflation fee was 2.4 per cent (down from 2.9).
The height was within the December-quarter 2022 when the inflation fee excessive 7.8 per cent.
The next graph exhibits the quarterly inflation fee for the reason that December-quarter 2005.
The following graph exhibits the annual headline inflation fee for the reason that first-quarter 2002. The shaded space is the RBA’s so-called targetting vary (however learn beneath for an interpretation).
What’s driving inflation in Australia?
The next bar chart compares the contributions to the quarterly change within the CPI for the December-quarter 2024 (blue bars) in comparison with the December-quarter 2023 (inexperienced bars).
Word that Utilities is a sub-group of Housing and are considerably impacted by authorities administrative selections, which permit the privatised firms to push up costs annually, often nicely in extra of CPI actions.
The impression of fiscal coverage on that sub-group through the electrical energy rebates has clearly been vital, which fits to point out that governments can average inflation by expansionary fiscal coverage if the drivers are from the supply-side.
It additionally demonstrates that financial coverage is ineffective in coping with this kind of inflation.
One of many fundamental drivers – Recreation and Tradition – was as a result of December holidays journey increase.
The following graph exhibits the contributions in factors to the annual inflation fee by the assorted elements.
The ABS famous that:
Electrical energy costs fell 9.9 per cent within the December quarter and 25.2 per cent prior to now 12 months.
The introduction of the 2024-25 Commonwealth Power Invoice Aid Fund (EBRF) rebates from July 2024 have been the principle driver for the autumn in electrical energy costs this quarter …
Excluding the rebates, electrical energy costs would have risen by 0.2 per cent within the December 2024 quarter.
The following graph is taken from the ABS and exhibits the impression of fiscal coverage in lowering the inflation fee.
EBRF refers back to the authorities’s Power Invoice Aid Fund.
Inflation and Anticipated Inflation
The next graph exhibits 4 measures of anticipated inflation produced by the RBA from the December-quarter 2005 to the December-quarter 2023.
The 4 measures are:
1. Market economists’ inflation expectations – 1-year forward.
2. Market economists’ inflation expectations – 2-year forward – so what they assume inflation will likely be in 2 years time.
3. Break-even 10-year inflation fee – The common annual inflation fee implied by the distinction between 10-year nominal bond yield and 10-year inflation listed bond yield. It is a measure of the market sentiment to inflation danger. That is thought-about essentially the most dependable indicator.
4. Union officers’ inflation expectations – 2-year forward – this sequence hasn’t been up to date for the reason that December-quarter 2023.
However the systematic errors within the forecasts, the value expectations (as measured by these sequence) at the moment are falling.
The Break-even 10-year inflation fee and the Market economists’ inflation expectations 2-year forward the expectations stay nicely throughout the RBA’s inflation concentrating on vary (2-3 per cent) and are declining.
The RBA has been claiming that inflation is just not falling quick sufficient – and the longer it stays above the inflation targetting vary, the extra seemingly it’s {that a} wage-price spiral and/or accelerating (unanchored) expectations will drive the speed up for longer.
Neither declare may be remotely justified given the information and was simply cowl for his or her coverage errors.
Implications for financial coverage
What does this all imply for financial coverage?
The Client Worth Index (CPI) is designed to mirror a broad basket of products and companies (the ‘routine’) that are consultant of the price of dwelling. You may be taught extra concerning the CPI routine HERE.
The RBA’s formal inflation concentrating on rule goals to maintain annual inflation fee (measured by the patron worth index) between 2 and three per cent over the medium time period.
Nonetheless, the RBA makes use of a variety of measures to establish whether or not they imagine there are persistent inflation threats.
Please learn my weblog publish – Australian inflation trending down – decrease oil costs and subdued economic system – for an in depth dialogue about using the headline fee of inflation and different analytical inflation measures.
The RBA claims it doesn’t depend on the ‘headline’ inflation fee.
As an alternative, they use two measures of underlying inflation which try and internet out essentially the most risky worth actions.
The idea of underlying inflation is an try and separate the development (“the persistent element of inflation) from the short-term fluctuations in costs.
The primary supply of short-term ‘noise’ comes from “fluctuations in commodity markets and agricultural situations, coverage modifications, or seasonal or rare worth resetting”.
The RBA makes use of a number of completely different measures of underlying inflation that are typically categorised as ‘exclusion-based measures’ and ‘trimmed-mean measures’.
So, you possibly can exclude “a selected set of risky gadgets – specifically fruit, greens and automotive gasoline” to get a greater image of the “persistent inflation pressures within the economic system”.
The primary weaknesses with this technique is that there may be “giant short-term actions in elements of the CPI that aren’t excluded” and risky elements can nonetheless be trending up (as in vitality costs) or down.
The choice trimmed-mean measures are widespread amongst central bankers.
The authors say:
The trimmed-mean fee of inflation is outlined as the common fee of inflation after “trimming” away a sure proportion of the distribution of worth modifications at each ends of that distribution. These measures are calculated by ordering the seasonally adjusted worth modifications for all CPI elements in any interval from lowest to highest, trimming away people who lie on the two outer edges of the distribution of worth modifications for that interval, after which calculating a median inflation fee from the remaining set of worth modifications.
So that you get some measure of central tendency not by exclusion however by giving decrease weighting to risky components. Two trimmed measures are utilized by the RBA: (a) “the 15 per cent trimmed imply (which trims away the 15 per cent of things with each the smallest and largest worth modifications)”; and (b) “the weighted median (which is the value change on the fiftieth percentile by weight of the distribution of worth modifications)”.
So what has been occurring with these completely different measures?
The next graph exhibits the three fundamental inflation sequence revealed by the ABS for the reason that December-quarter 2009 – the annual proportion change within the All gadgets CPI (blue line); the annual modifications within the weighted median (inexperienced line) and the trimmed imply (pink line).
The most recent information for the three measures exhibits:
| Element | Quarter % | Annual % |
| All teams CPI | 0.2 (final 0.2) | 2.4 (final 2.8) |
| Trimmed imply sequence | 0.5 (0.8) | 3.2 (3.6) |
| Weighted median sequence | 0.5 (0.9) | 3.4 (3.7) |
The next graph exhibits the evolution of those sequence since 2009.
we assess these outcomes?
1. The RBA’s most well-liked measures stay outdoors the concentrating on vary and so they have been utilizing that truth to justify their fee hikes since Could 2022 though the components which were driving the inflation till late 2022 weren’t delicate to the rate of interest will increase.
2. The RBA additionally claimed the NAIRU was 4.25 per cent and with unemployment steady at round 3.9 per cent, they thought-about that justified additional fee rises. Nonetheless, if inflation is falling persistently with a steady unemployment fee then the NAIRU should be beneath the present official unemployment fee of 4 per cent.
3. There isn’t a proof that inflationary expectations are accelerating – fairly the other and that has been the case for some months now.
4. There isn’t a vital wages strain.
5. A serious contributor to the present scenario – rents – are, partly, being pushed up by the rate of interest rises.
6. There isn’t a justification for any additional fee rises, particularly given the slowdown in retail gross sales famous above.
Conclusion
The most recent CPI information confirmed that the inflation fee is falling quick and is firmly throughout the RBA’s inflation concentrating on vary with no indicators of an acceleration pending.
It’s now nicely beneath the RBA’s forecasts, which, in flip signifies that the coverage settings by the RBA are unsuitable (utilizing their very own logic).
As soon as once more it’s wanting just like the RBA has made a monumental error in driving rates of interest up so excessive, when the components driving the inflation episode weren’t delicate to these modifications and have been at all times going to abate on their very own accord.
That’s sufficient for immediately!
(c) Copyright 2025 William Mitchell. All Rights Reserved.