Taylor Nugent | Markets Research
Q4 CPI was in line with our expectations. Weighing on headline again this quarter was a measured fall in electricity prices which fell 9.9% q/q, without the rebates they would have risen 0.2% q/q. Volatile fuel prices fell 2.0% q/q after a 6.7% fall last quarter. Housing accounted for almost all of the improvement in trimmed mean inflation in the quarter. Some of that is temporary, but the plateauing in house construction costs are an important and helpful shift in the CPI backdrop that support downward revisions to the RBA’s near term outlook. Further out, given unemployment has noticeably undershot their forecasts, the extent to which the RBA remains comfortable inflation will stay near target depends on the extent to which they re-assess the degree of spare capacity in the labour market.
Inflation is not a barrier to a cut in February and the meeting is live. NAB’s RBA call is under review. Our call has been that on balance the RBA would hold fire before cutting in May given there is little urgency to cut and there is option value in waiting to better assess the trajectory of the labour market and the extent of the pickup in growth, before delivering 75bp of cuts this year. By April, the RBA would have 2 more unemployment prints, Q4 GDP, Q4 WPI, and the February CPI Indicator. By May, the RBA would have Q1 CPI and an additional 2 employment prints.
Overall, our heatmap in Table 1 shows inflation was especially soft in the quarter through housing components and volatile items including fruit and veg, automotive fuel, and travel. Subsidy impacts also weighed in the quarter, from electricity to rent assistance to cheaper vehicle rego in Queensland. None of that is to dispute that the RBA’s November inflation forecasts were too pessimistic and the inflation detail is meaningfully better than the RBA feared when they drew their pessimistic November forecasts.
New Dwelling construction costs and Rents are the two largest components of the CPI. A 0.2% q/q decline in New Dwelling costs marks a rapid slowdown from its recent pace, and the component contributed 14bp less to trimmed mean in Q4 than in Q3. A 10% increase in rent assistance also subtracted 10bp from trimmed mean CPI. Together, these components accounted for almost all of the slowdown in trimmed mean. Rents will rebound in Q1 before gradually cooling from late 2025. New Dwellings, however, will be an ongoing source of lower inflation relative to earlier in 2024, and are a hugely important shift in the CPI backdrop
Services: Overall services inflation slowed to 4.3% from 4.6% y/y. Looking at a subset of services closely watched by the RBA as in indicator of domestic demand pressure, market services inflation excluding travel and telco was 0.8% q/q (in line with our forecast), its lowest since Q2 2021. That includes the impact of rent assistance. Further excluding rents shows market services inflation at 0.8% q/q after 1.0% and 0.9%. Consistent with ongoing gradual progress on services inflation. Elevated insurance inflation had been a key driver of elevated services inflation, in large part reflecting catch-up to earlier underlying cost pressures through car and dwelling replacement and repair costs, but, as already confirmed in the November monthly outcome, are now fading.
Goods: Durable goods prices (outside of new dwellings) remain broadly benign, though market goods prices outside of food, tobacco and new dwellings as rose 0.2% q/q (NAB 0.3% q/q) and 1.0% y/y. Grocery price inflation continues to annualise above 2% y/y, above the 0.7% y/y pace that prevailed last time inflation was sustainably near target.
Chart 1: Headline and Trimmed Mean Inflation
Chart 2: Contributions to CPI inflation
Table 1: CPI heat map. Shows 3-, 6- and 12m annualised outcomes. Shading reflects how far inflation is above or below a benchmark of the 6 years to 2015 when inflation averaged around the mid-point of the target
Chart 3: Tradable and non-tradable inflation
Chart 4: Market goods inflation
Chart 5: Market services inflation
Chart 6: Share of basket with elevated annualised price increases fell sharply, again due to lower inflation in large rents and new dwelling components
Chart 7: Distribution of price increases has shifted noticeably lower since the peaks in inflation, and Q4 2024 included a notable negative skew
Table 2: Comparison to forecast
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