Australians collectively exhale as inflation slows more than expected

That woosh-like sound on Wednesday morning was the collective sigh of relief as the latest and unexpectedly low inflation data numbers were released – in turn boosting borrowers’ confidence that after 20 months the cycle of rate rises has come to an end.

This is almost the last major puzzle piece that the Reserve Bank will get before it decides which way to jump at its February monetary policy meeting. But there was nothing in Wednesday’s November inflation data that would provide an incentive or excuse to raise rates in three weeks.

Reserve Bank governor Michele Bullock’s inflation-busting credentials have improved thanks to latest CPI figures.
Reserve Bank governor Michele Bullock’s inflation-busting credentials have improved thanks to latest CPI figures.Credit: Dominic Lorrimer

The consumer price index fell to its lowest level in almost two years – rising 4.3 per cent in the 12 months to November, down from the rise of 4.9 per cent in October – sealing the deal that barring something from left field, the Reserve Bank has finished the heavy lifting on taming inflation.

At the end of January, we will see the December quarter read for inflation. We already have the answers for October and November, and there is almost no expectation that inflation spiked in the final month of the year.

The icing on the cake is that services inflation, which has been tougher to control, showed strong signs of coming down in November. It had been a hold out that had concerned the Reserve Bank but in November, it fell from 5 per cent to 4.7 per cent.

The usual suspects such as housing, including rents, gas and electricity and insurance, were the categories where inflation remains strong.

So now there’s a new game in town – predicting when the Reserve Bank might begin cutting rates.

Relatively strong price rises in food will provide fodder for politicians to attack supermarket prices, but interestingly within that food subset, meat and seafood rose just 0.2 per cent and fruit and vegetables grew only 0.7 per cent.

It’s in dairy produce, cereals and bread that prices are particularly elevated in November – even though food inflation overall experienced a better outcome than it did in October.


Against this, there are categories such as clothing and furnishings that are actually deflating as consumer demand for discretionary products has taken a hit.

So now there’s a new game in town – predicting when the Reserve Bank might begin cutting rates.

There will certainly be a pull-forward on that timing from many economists who previously expected to see rate cuts from September or not until early next year.

Following Wednesday’s inflation read, Capital Economics is predicting rates will come down as early as May.

AMP economist Shane Oliver expects inflation for December quarter 2023 will be comfortably under the Reserve Bank forecast of 4.5 per cent year-on-year and rate cuts will start mid-year.

Capital says that it increasingly appears that inflation will undershoot the Reserve Bank’s own November forecasts.

That said, the Reserve Bank had to impose plenty of pain on borrowers to get inflation back under control and may be reluctant to ease rates until inflation comes closer to the central bank’s target band of between two and three per cent.

And one can never discount the emergence of some kind of external shock from the global community that would spark fresh inflation.

The Commonwealth Bank is forecasting the annual rate of inflation back at 3 per cent at the end of 2024, well ahead of the Reserve Bank’s current forecast and closer to the Commonwealth government’s latest forecast. It is expecting the Reserve Bank to start cutting rates around September.

The CBA’s forecast is in line with what the general economics community had been predicting before Wednesday’s inflation number was released.

But this better than expected CPI figure will likely trigger a rethink by some.

Regardless of the different forecasts, this is positive news for those with a mortgage.

“It’s hard to think of better news to start the year for Aussie households, businesses and the Reserve Bank of Australia,” declared Moody’s Analytics.

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