Latest inflation figures dash hopes of imminent second rate cut

The latest Consumer Price Index (CPI) monthly indicator shows a slight uptick in trimmed mean inflation for the month of January to 2.8% from 2.7% in December.

Trimmed inflation mean, which excludes some of the most volatile price changes, is the measure the bank relies on to paint the most accurate picture of economic health.

The upward trajectory last month will be a disappointing blow to homeowners hoping to see another rate cut in the coming months on the back of last week’s 0.25% handout.

CPI indicators for headline inflation have now recorded six months of figures within the Reserve Bank of Australia’s 2-3% target range, but trimmed mean inflation is yet to crack 3% in the ABS’ more comprehensive quarterly data updates.

Trimmed mean inflation came in at 3.2% for the December quarter, the lowest level recorded since the end of 2021.

RBA accused of sending mixed messages

The RBA board’s decision to cut the cash rate from its 13-year high of 4.35% to 4.10% this month retained an element of surprise despite having been priced in by markets.

Deloitte Access Economics partner Stephen Smith said the decision “was seen by informed commentators as a very close call” and was “at odds with the board’s consistent messaging”.

Cutting the cash rate is 'at odds' with the RBA's messaging over the last 12 months, according to Deloitte Access Economics. Picture: Getty

“For the last 12 months, the Reserve Bank has reiterated two key elements of its view again and again," Mr Smith said.

"First, that services inflation is running too fast. Second, that the level of demand in the economy is too high.

“Other than inflation and labour market prints, there has been little new data since the last interest rate decision in December, and none of this data was at odds with the Bank’s stated views.”

While acknowledging the economy “needed a rate cut”, Mr Smith said it was “somewhat surprising that the Reserve Bank concluded that this data had been sufficiently material to alter its central view of the economic outlook”.

“The decision appears to be a concession by the Bank that the level of demand in the economy is not too high relative to supply, after all,” he added. “The decision was a loss for the credibility of the Reserve Bank’s communication.”

Reserve Bank acknowledges uncertainties

In a statement last week accompanying the rate cut, the RBA board said it remained cautious on prospects for further policy easing, a notable contrast to its usually confident context setting.

'The Reserve Bank of Australia and the cash rate': youtube.com/mortgagechoice

“There are notable uncertainties about the outlook for domestic economic activity and inflation,” the statement read. “Labour market conditions remain tight and, in fact, tightened a little further in late 2024. Furthermore, productivity growth has not picked up, which implies that growth in unit labour costs remains high.”

Moving forward, the board confirmed its key projection was for growth in household consumption to increase in line with income growth.

“But there is a risk that any pick-up in consumption is slower than expected, resulting in continued subdued output growth and a sharper deterioration in the labour market than currently projected,” it warned.

Inflation figure reactions

In a joint statement, treasurer Jim Chalmers and minister for finance Katy Gallagher acknowledged the monthly CPI numbers were not always a reliable indicator.

“Monthly numbers are volatile and can bounce around,” the statement read. “We’ve seen around the world that inflation doesn’t moderate in a straight line, with inflation rising in almost every major advanced economy in January.”

Shadow treasurer Angus Taylor was equally cautious on ruling in more positive news.

“We know past episodes of inflation through history have often resurged,” he said at a press conference. “We’ve seen inflation come down and then go back up again. We are seeing a resurgence of inflation.

“The Reserve Bank governor has said that this is homegrown inflation and it's clear that domestic inflation has run much harder than trade inflation.”

The next CPI indicator update will come on 26 March, ahead of Reserve Bank’s next decision on rates on 1 April.