AUSTRALIA DATA: Inflation Heading Towards Band, Services Stay Sticky

Q4 CPI measures printed 0.1pp below consensus with underlying measures trending towards the top of the RBA’s 2-3% band but still “some way” from the 2.5% mid-point. The data should increase the RBA’s “confidence that inflation is moving sustainably towards target” as annual rates printed 0.2pp below its November forecasts. There will be updated projections at its February 18 meeting and the timing of 2.5% trimmed mean inflation will be important for its decision. 

Australia CPI y/y%

Source: MNI - Market News/Refinitiv/ABS

• The lower-than-expected Q4 outcome is likely to bring down near-term inflation forecasts but the labour market remains tight with its moderation having stalled, the AUD is softer and productivity growth remains very weak. These other factors may result in the target mid-point still only achieved in mid- to late-2026 and a rate cut pushed out into Q2.
• Q4 trimmed mean inflation rose 0.5% q/q driving a moderation in the annual rate to 3.2% from an upwardly-revised 3.6% in Q3. It excluded electricity and fuel prices and the increase was driven by recreation while housing (new dwellings -0.2% q/q) helped to offset it.
• Services inflation moderated to 4.3% y/y in Q4 from 4.6% but is still elevated and in line with the trend since Q4 2023. It appears to still be moving sideways, while core services picked up 0.1pp to 4.2% y/y and rose 1.1% q/q and continues to prove sticky. The ABS said that rents, medical & hospital services and insurance are keeping services high.
• The RBA noted in the December minutes that “underlying inflation was still too high, underpinned by persistently high services price inflation”. Q4 data hasn’t improved this.
• The ABS noted that without the government’s electricity rebates, prices would have risen 0.2% q/q compared to the 9.9% q/q drop recorded.

Australia services CPI y/y%

Source: MNI - Market News/Refinitiv/ABS