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Monthly CPI continues to show inflation easing

Australia’s monthly inflation data – delivered through the Consumer Price Index (CPI) – is the most-timely information on what is happening with price movements in the economy. The January data shows the hard-won progress fighting inflation with thirteen rate rises since May 2022, is moving closer to the RBA target range of 2%-3% per annum.

The monthly CPI series reports the annual inflation rate in January 2024 was 3.2%, steady with December 2023, and the lowest level since November 2021.

When excluding volatile items, the annual increase in inflation was 4.1%, down from 4.2% in December and well below the peak of 7.2% in December 2022.

In assessing the significance of the recent inflation experience, David Bassanese from Beta Shares commented that:

“In seasonally adjusted terms, the CPI excluding volatile items and holiday travel rose by 0.2 per cent — the fifth consecutive 0.2 per cent increase, which is equivalent to annualised inflation of only 2.4 per cent.”

(note: data rounded to 1 decimal place).

On that basis alone, Bassanese concluded, “inflation has already fallen to the bottom of the RBA’s 2 to 3 per cent inflation band.” Well, a year is not five months, but the recent trend is looking very good, at least.

For the forestry and wood products industry and the supply chains it feeds, there was continued positive news, as new dwelling prices continued to ease, falling to 4.8% growth for the year-ended January 2024.

The ABS commented that the rate of price growth continues to slow, and remains low, compared to levels recorded over 2022, reflecting improvements in the supply of materials and subdued new demand.

However, as can be seen in the above chart, rents increased an average 7.4%, reflecting strong demand for rental properties and tight rental markets, highlighting the ongoing challenge to build more housing stock.

For all the value of the monthly data, the quarterly CPI data series remains the most reliable, as it covers the full basket of products included in the CPI. The RBA’s recent Statement on Monetary Policy released in February, provided some useful insights into the December quarter CPI.

In particular, the RBA remains concerned about the elevated level of services inflation, which can be observed in the chart below.

As the chart identifies, in the December quarter, as goods inflation declined (blue bars) services (orange bars) and rents (red bars) together have become the major contributor to inflation.

The RBA commented that:

“…high inflation in market services reflects the strong level of demand exceeding supply and continued pressure from both labour and domestic non-labour input costs such as insurance, legal, accounting and administrative services….”

In a harbinger of a difficult debate to come, the RBA also commented:

“Unit labour costs represent a large share of input costs for market services firms and have grown strongly of late.”

The debate will go something like this.

An increased proportion of the economy is engaged in the provision of services and more people are employed there than ever before. They are in fact, more labour intensive than capitally intense industries like manufacturing (for the most part).

Because services industries are more reliant upon labour than capital, they are more sensitive to movements in wages. Therefore, those industries must keep wages restrained.

However, it is wages and disposable income that drive economic growth, so at the same time as keeping them down, it would be good if those service industry wages also increased.

Australia might hit its 2% to 3% annual inflation target, but it might also find itself in more volatile territory in future as it fights to sustain that goal.

Posted Date: March 17, 2024

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