Consumer price inflation in Australia edged up from three-year lows in November due to a rise in electricity costs. However, a decline in core inflation strengthened the argument for an interest rate cut as soon as next month.
The Australian Dollar fell by 0.34% to $0.6214 at the time of writing, while three-year bond futures recovered from earlier losses, rising 4 ticks to 96.11. Market swaps now suggest a 64% likelihood of a rate cut in February, up from 50% previously.
Data from the Australian Bureau of Statistics released on Wednesday revealed that the monthly consumer price index rose at an annual rate of 2.3% in November, up from 2.1% in October and slightly above the market forecast of 2.2%, Reuters reports.
Electricity prices surged by 22% in November, but this increase was mainly driven by the timing of government rebates. Despite the rise, electricity subsidies from federal and state governments helped reduce prices by 21.5% compared to the previous year.
More notably, the trimmed mean, a key indicator of core inflation, dropped to an annual 3.2% in November, down from 3.5%, bringing it closer to the Reserve Bank of Australia's (RBA) target range of 2% to 3%.
“The good news is that measures of core inflation suggest that underlying price pressures are indeed easing in earnest,” according to Abhijit Surya, the Australia and New Zealand economist for Capital Economics.
Surya added that if the same result is reflected in the quarterly CPI report due later this month, it would provide the central bank with increased confidence that it is on course to meet its inflation target.
“The upshot is that today’s data raise the risk that the RBA will begin its easing cycle earlier than May, as we’re currently predicting,” he said.
The central bank has maintained interest rates at 4.35% for over a year, believing that this level, up from a record-low 0.1% during the pandemic, is restrictive enough to bring inflation within its target range while safeguarding employment growth.
The labour market has remained unexpectedly strong, with data released on Wednesday revealing that job vacancies rebounded in the November quarter, ending a nine-quarter streak of declines.
The RBA unexpectedly adopted a more dovish stance last month as economic growth continued to be sluggish. A rate cut in February could make it easier for the Labour government to call an early election, which must be held by May at the latest.
On Wednesday, Treasurer Jim Chalmers expressed approval of the slowdown in underlying inflation.
“We are very encouraged by the substantial and sustained progress we have made... The Reserve Bank will factor all of that in when it meets at the next occasion and subsequently throughout the year,” he said.
The government is planning to prepare a pre-election budget in March.