Inflation is slowing down, but are rate cuts any closer?

Household inflation has fallen to its lowest annual rate since March 2021, according to the latest figures from the Australian Bureau of Statistics (ABS) which reveal that inflation rose 2.8% in the 12 months to October.

Throughout the September quarter the cost of goods and services tracked by the Bureau's Consumer Price Index (CPI) increased by just 0.2% across the board - down from the 1% increases recorded in both the March and June quarters.

"The September quarter's rise of 0.2% is the lowest outcome since the June 2020 quarter fall which occurred during the COVID-19 outbreak and was driven by free childcare," says Michelle Marquardt, head of prices statistics at the ABS.

The ABS says that the largest contributors to inflation during the quarter were associated with recreation and culture (1.3% higher) and food and non-alcoholic beverages (0.6% higher).

Specifically, it highlighted notable rises in the cost of travel and accommodation (both domestic and international), as well as eating out and getting takeaway.

However, these increases were partially offset by significant drops in the price of automotive fuel and electricity throughout the quarter.

"The 2024-25 Commonwealth Energy Bill Relief Fund rebates in all states and territories and state government electricity rebates in Queensland, Western Australia and Tasmania led to a large fall in electricity prices this quarter," Marquardt explains.

"Without the rebates, electricity prices would have increased 0.7% this quarter."

What does the latest inflation data mean for interest rates?

Now that the September quarter CPI results are in, attention will shift to interest rates given that the Reserve Bank Board is set to meet next Tuesday afternoon.

What makes the RBA's November meeting arguably more interesting is that, for the first time since 2021, the annual headline inflation rate (2.8%) is now sitting within the Reserve Bank's target range of 2-3%.

However, the annual rate of trimmed mean inflation - which excludes more extreme price changes and is often cited as the RBA's preferred metric - is still outside of that range, at 3.5%.

Devika Shivadekar, an economist at RSM Australia, doesn't think that the latest inflation figures will be enough to compel the RBA to move on rates any faster. Instead, she suggests that the first quarter of next year is the most likely starting point for any cuts.

"Although the figures are a step in the right direction, concerns surrounding the persistent tightness in the labour market give the RBA every reason to maintain the status quo at 4.35% next month.

"Whether the combined effects of easing inflation, government subsidies and tax cuts, and the holiday spending season will drive demand to a level that prompts the central bank to delay its rate cut remains to be seen. For now, we anticipate the easing cycle to commence in the first quarter of 2025."

Elsewhere, economists at the Commonwealth Bank have pushed back their timeline for a future rate cut following the release of the September quarter inflation figures.

The bank had maintained that a rate reduction before the end of the year was a possibility, but that forecast has been amended to suggest that the RBA is now likely to begin cutting rates in February and take 100 basis points off the cash rate in total throughout 2025.

"The process of normalising the cash rate will be a story for 2025," Commonwealth Bank economists Gareth Aird and Stephen Wu wrote in a research note published after the CPI release.

"As a result of today's data we see the RBA on hold at both the November and December Board meetings. Our expectation is that the disinflation process will continue over the fourth quarter of 2024 and the Board will view February 2025 as the most appropriate time to commence cutting rates."

Is the cost-of-living crisis over?

There's no doubt that the confirmation that prices of many everyday goods and services aren't going up as rapidly as they have been, will be welcome news. And there's evidence to suggest that Australians are beginning to feel a difference.

Though the cost of living continues to be the largest driver of stress among Australian consumers, NAB's latest quarterly Consumer Sentiment survey found that concerns had eased in recent months to their lowest point since early 2022.

The research also suggests that many consumers aren't cutting back quite as much on their discretionary spending (e.g. eating out and taking holidays) as they were a few months ago.

However, that's not to say that many households aren't continuing to feel the pressure of higher costs. After all, the price runup over the last few years has been significant, and while the rate of inflation is moderating, prices are still increasing.

According to a recent survey conducted by Compare The Market, households are still seeing considerable increases in the cost of expenses like groceries, energy and insurance.

Between January and August, Compare the Market found that the median price of a weekly grocery shop rose from $150 to $200, while quarterly electricity bills went up from $300 to $350 - though those bills will have been tempered recently by government rebates.

Households have also been hit with price hikes to their home, contents and car insurance premiums says Compare The Market spokesperson, Chris Ford.

"Even if you were lucky enough to avoid any damage and a claim, you've still probably seen your insurance bill go up, as insurers account for the extra risk.

"Higher construction, material and labour costs have compounded that issue, as it's much more expensive to repair or rebuild a home."

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