Australia CPI expected to ease further in December, nearing RBA’s target
- The Australian monthly Consumer Price Index is foreseen at 2.5% in December.
- Quarterly CPI inflation expected to ease further below 3%, with core figures nearing RBA’s goal.
- The Reserve Bank of Australia will meet on February 18 to decide on monetary policy.
- The Australian Dollar falls ahead of the announcement amid prevalent risk aversion.
Australia will release fresh inflation-related data on Wednesday, and financial markets anticipate price pressures eased further at the end of 2024, paving the way for a Reserve Bank of Australia (RBA) interest rate cut when it meets in February.
The Australian Bureau of Statistics (ABS) will publish two different inflation gauges: the quarterly Consumer Price Index (CPI) for the fourth quarter of 2024 and the December monthly CPI, which measures annual price pressures over the past twelve months. The quarterly report includes the Trimmed Mean CPI, the RBA’s favorite inflation gauge.
The RBA has maintained the Official Cash Rate (OCR) steady at 4.35% since November 2023, claiming inflation needs to “sustainably” return to its target band of 2% - 3% before considering a rate cut. The latest Board meeting took place in December, and officials claimed they were “gaining confidence” that inflation was moving in the right direction.
It is worth remembering, however, that the RBA has a dual mandate, as full employment is also part of it. Nevertheless, inflation figures will be crucial to determine whether an interest rate cut is finally reaching Australian shores.
What to expect from Australia’s inflation rate numbers?
The ABS is expected to report that the monthly CPI rose by 2.5% in the year to December, higher than the 2.3% posted in November. The quarterly CPI is foreseen to increase by 0.3% quarter-on-quarter (QoQ) and by 2.5% year-on-year (YoY) in the final quarter of 2024. Additionally, the central bank’s preferred gauge, the RBA Trimmed Mean CPI, is expected to rise by 3.3% YoY in Q4, easing from the 3.5% advance posted in the previous quarter.
Finally, the RBA Trimmed Mean CPI is forecast to increase by 0.6% QoQ, the lowest quarterly result since mid-2021. The anticipated figures will be below the central bank’s forecast, boosting the odds of an interest rate cut when the Board meets in February.
But it is not just about inflation falling to target. Economic growth in the country has been tepid, to say the least. Australian Gross Domestic Product (GDP) rose 0.3% in the third quarter of 2024 and by 0.8% since Q3 2023. Economic progress may not be part of the RBA’s mandate, but officials can not ignore the effects of monetary policy on economic growth.
Meanwhile, Donald Trump has become the 47th president of the United States (US). The Republican leader has pledged to impose massive tariffs on imports, spurring concerns about global trade costs.
Just recently, Treasury Secretary Scott Bessent pushed for new universal tariffs on US imports starting at 2.5% and rising gradually, the Financial Times reported on Monday. However, President Trump quickly responded by saying that he wanted much bigger uniform levies. Tariffs could affect global manufacturing costs and, hence, push inflation higher. With that in mind, central banks may refrain from trimming interest rates.
However, Trump’s trade war against China may end up benefiting Australia. The US President may push tariffs into all major rivals, yet the higher levies will be on Chinese goods and services. With that in mind, RBA Governor Michelle Bullock recently noted that “If there are large tariffs on China, Chinese trade will probably try to find other ways to find an outlet. Australia might even be a beneficiary of that. So we might, in fact, find some deflationary impacts for Australia if it rolls out that way.”
How could the Consumer Price Index report affect AUD/USD?
Inflation figures are, then, crucial. Easing inflationary pressures coupled with Bullock’s recent comments will fuel bets on an RBA rate cut on February 18.
Generally speaking, higher CPI figures will be bullish for the AUD amid expectations of a persistently hawkish RBA. However, the opposite scenario is also valid: easing inflation could push policymakers to shift towards a more dovish stance.
Heading into the CPI release, the AUD/USD pair trades around 0.6250, down for a second consecutive day.
Valeria Bednarik, FXStreet Chief Analyst, says: “The AUD/USD pair is gaining bearish traction ahead of Australian CPI figures amid a risk-averse environment. The USD is firmer as tariffs-related concerns dominate financial boards. Further slides are likely should inflation data result as expected or below expectations. On the contrary, higher-than-anticipated figures may trigger some near-term AUD/USD gains, yet if fears prevail, the advance will likely be short-lived.”
Bednarik adds: “The AUD/USD pair could fall towards the 0.6200 region as an immediate reaction to the news, while a bearish breakout exposes 0.6164, the January 17 low. Should that level give up, the next bearish target is the January 13 low at 0.6130. Technical readings in the daily chart suggest a limited bullish potential. Still, a recovery beyond the 0.6300 threshold may result in the pair testing the 0.6330 price zone before fresh selling resurges.”
Inflation FAQs
Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.
The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.
Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.
Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it. Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.
Economic Indicator
Monthly Consumer Price Index (YoY)
The Monthly Consumer Price Index (CPI), released by the Australian Bureau of Statistics on a monthly basis, measures the changes in the price of a fixed basket of goods and services acquired by household consumers. The indicator was developed to provide inflation data at a higher frequency than the quarterly CPI. The YoY reading compares prices in the reference month to the same month a year earlier. A high reading is seen as bullish for the Australian Dollar (AUD), while a low reading is seen as bearish.
Read more.Next release: Wed Jan 29, 2025 00:30
Frequency: Monthly
Consensus: 2.5%
Previous: 2.3%
Source: Australian Bureau of Statistics
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