Inflation rises to 1.8%, February rate cut odds sink

Image: Drought conditions were said to have driven food prices up. Photo by Dan Gold on Unsplash

Australia's inflation rate has risen higher than expected, signalling a lower chance of a cash rate cut next week.

The December quarter's headline inflation was 0.7%, taking the seasonally-adjusted annual figure up to 1.8%, according to the latest Australian Bureau of Statistics (ABS) data.   

Economists had widely tipped inflation to be 0.6% for the December quarter, and 1.7% for the year. 

The unexpected rise in inflation saw the market odds of an RBA (Reserve Bank of Australia) cash rate cut next month fall to a less than 10% chance.  

However, the RBA is still widely expected to cut the cash rate later this year, with the December inflation data representing the 16th consecutive quarter where the headline number has been outside the RBA's (Reserve Bank of Australia) target of 2-3%.

ABS Chief Economist Bruce Hockman said tough climate conditions contributed to the CPI rise.

"Drought conditions are impacting prices for a range of food products. Food prices increased 1.3 per cent this quarter with price rises for beef and veal (+2.9 per cent), pork (+4.7 per cent), milk (+1.7 per cent) and cheese (+2.4 per cent)," Mr Hockman said.

"Both the impact from the drought and lower seasonal supply contributed to price rises for fruit (+6.8 per cent) this quarter."

The most significant rise in the December 2019 quarter was the price of tobacco, which is up 8.4%. 

Domestic holiday, travel and accommodation rose 7.3%, while automotive fuel rose 4.4%. 

The most significant price falls this quarter were international holidays, travel and accommodation (-2.9%) and women's garments (-2.5%).

The inflation news comes after the national unemployment rate fell to 5.1%, transcending expectations it would rise to 5.3%. 

Q4 headline inflation surprised to the upside at 0.7%qoq/1.8%yoy (mkt: 0.6%qoq/1.7%yoy) with trimmed mean at 0.4%qoq/1.6%yoy, near market/RBA expectations (mkt: 0.4%qoq/1.5%yoy); unlikely to change chances of near term rate cut (still possible but unlikely).#ausbiz #rba pic.twitter.com/nnSojryOZk

— Alex Joiner (@IFM_Economist) January 29, 2020

Positive news for renters, potential home owners

The housing category saw a modest price increase of 0.1% in the December quarter, but there were decreases in several key areas.

"Through the year to the December 2019 quarter, price falls were recorded for utilities (-1.0%) and new dwelling purchase by owner-occupiers (-0.1%), while rent price rises remained modest (+0.2%)," Mr Hockman said. 

The ABS attributed the quarterly fall in utilities of -0.6% to the switch to off-peak pricing in Melbourne for gas and other household fuels, along with the introduction of new market offers with lower supply and usage charges for electricity, gas and other household fuels.  

The main driver of the 0.1% increase was new dwelling purchases by owner-occupiers, which is up 0.4%.

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