Fast-falling inflation points to interest rate relief

The sharpest annual drop in inflation in recent memory has all but ensured interest rates will be kept on hold when the Reserve Bank of Australia meets next Tuesday (6 February).

The official Consumer Price Index readings released on Wednesday (31 January) showed that annual inflation has nearly halved in just 12 months.

Inflation rose 0.6 per cent in the December 2023 quarter and 4.1 per cent over the 12 months, down from an annual rate 5.4 per cent for the September quarter. It is the smallest quarterly increase since March 2021.

The easing rate of growth should be enough to satisfy the Reserve Bank that it doesn’t need a further rate rise in February, according to Canstar’s finance expert, Steve Mickenbecker. 

“Even for those without a mortgage, the going has been tough over the past year with the cost of living up by 4.1 percent,” Mr Mickenbecker.

“Not many workers have enjoyed the 4.1 percent wage increase needed just to tread water.”

Canstar analysis showed the average working Australian would have needed almost a $4,000 pay rise to have kept pace with inflation over the past year.

CoreLogic’s Head of Research, Eliza Owen, also said the declining inflation rate was good news for borrowers.

“The more inflation comes in under expectations, the firmer the case for interest rates remaining on hold next week and coming down later this year.”

There was a catch-22, however, with the prospect of rising property prices in anticipation of lower interest rates actually stalling interest rate cuts.

“A reduction in interest rates is likely to boost housing demand,” Ms Owen said.

“As seen in the rental market, fundamental demand for housing is very strong, but demand for home purchases has been influenced by high interest costs and limited borrowing capacity.

“The RBA would probably not consider more exuberance in the housing market an ideal scenario if interest rates came down.

“However, established dwelling purchases do not feed directly into inflation measures, and other macroprudential tools can still be used to ensure housing lending remains prudent.”

According to CoreLogic, for the purchase of new homes, the CPI measure eased to 5.1 per cent, down from 5.2 per cent in the previous quarter and a peak of 20.7 per cent in the year to September 2022.

“While the rate of increase is easing, residential construction remains a substantial contributor to inflation overall, and was the most significant contributor to inflation in the quarter overall,” Ms Owen said.

“High labour and material costs continue to put pressure on the price of new homes.”

Rents rose 0.9 per cent in the quarter and 7.3 per cent annually, slightly lower than the 7.6 per cent annual rise in the September 2023 quarter.

The most significant quarterly price rises were tobacco, up 7.0 per cent, new dwellings purchased by owner occupiers, up 1.5 per cent, domestic holiday travel and accommodation up 3.9 per cent and medical and hospital services up 1.2 per cent.

Federal Treasurer Jim Chalmers said the lower inflation rate was welcomed but more needed to be done.

“Today’s very welcome results are even better than market expectations, but we know people are still under pressure, which is why Labor’s cost of living tax cuts for middle Australia are so important.”

“New data from the the ABS shows we are making very welcome and encouraging progress in the fight against inflation, Government policies are helping, but this is not mission accomplished because we know people are still under pressure,” Mr Chalmers said.

Rate hike ‘frenzy’ over

Leanne Pilkington, President, Real Estate Institute of Australia, said the RBA’s 13 rate hikes since May 2022 are “slowly but surely putting the inflation genie back into the bottle”.

“The CPI data comes on the back of retail spending figures which nose-dived in December by 2.7 per cent and was the largest December fall on record,” Ms Pilkington said.

“Over the past year, sales have increased by only 0.8 per cent.

“Once population growth is taken into account, the value of sales per capita has fallen sharply over the past 12 months.

“The lagged response to the successive interest rate hikes is showing up in the CPI and other economic data and the pointers are that we have seen the end of rate rises.

“If this continues, home buyers can anticipate a rate reduction later this year,” Ms Pilkington said.

Zippy Financial Director and Principal Broker, Louisa Sanghera, said that excluding the volatility during the first year of the pandemic, the annual result was the sharpest inflation drop in recent history and shows the central bank was trigger happy on rate hikes.

“Borrowers had to cope with the most rapid rate of interest rate increases on record as the Reserve Bank pumped up repayments, almost in a frenzy, without giving mortgage-holders the benefit of allowing much time to pass between each increase,” Ms Sanghera said.

“The November rate rise, in particular, was completely unnecessary.

“Now, inflation has dropped so quickly that the Reserve Bank must move to an easing bias at its meeting in February with rate cuts on the agenda in coming months too.”

Renters feeling the heat

Rents remain 3.2 per cent above the CPI annual figure, and the strain is evident among the one third of Australians in a rental property.

A survey released Wednesday found that of more than 1000 renter respondents a shocking 70 per cent were spending more than 30 per cent of their gross income on rent - which is the common definition of being in rental stress.

The InfoChoice Rent Crisis survey found much of the blame was pinned on government.

According to the survey, renters most often blamed the Federal Government (37.2 per cent) for the rental situation, followed by landlords (32.4 per cent) and the Reserve Bank (24.0 per cent).

A staggering 96.2 per cent believed the government should do more to help renters. Almost half of all renters (48.9 per cent) stated that the rental market would affect their vote in future elections.

Among the government responses, more public housing was the most popular (25.8 per cent), followed by ‘more financial incentives to build new homes’ (23.8 per cent) and ‘reduce immigration’ (19.1 per cent). More than 16 per cent wanted a ban on Airbnb rentals.

InfoChoice’s Money Analyst, Harrison Astbury, said the survey showed that renters were experiencing stress at more than double the rate that homeowners were reportedly experiencing mortgage stress.