The annual rate of inflation remained steady in February, at 3.4 per cent

The annual rate of inflation remained steady in February, at 3.4 per cent
  • PublishedMarch 28, 2024

The annual rate of inflation remained steady in February, at 3.4 per cent.

It means the monthly consumer price index (CPI) indicator has been 3.4 per cent for three months in a row.

Economists say inflation seems to be heading in the right direction, but given the patchy nature of the monthly inflation data it’s too early to know if inflation is trending down at a pace the Reserve Bank expects.

According to the Bureau of Statistics, an underlying measure of inflation — called ‘trimmed mean’ inflation — did pick up slightly in February, from 3.8 per cent to 3.9 per cent.

But economists say the headline measure of inflation did come in a little lower than expected and overall, this inflation data will likely have neutral implications for the interest rate outlook.

“The inflation report was a touch better than feared,” said chief economist David Bassanese from BetaShares.

The ABS says the most significant contributors to inflation in February were housing (+4.6 per cent) and food and non-alcoholic beverages (+8.4 per cent).

Alcohol and tobacco (+6.1 per cent) and insurance and financial services (+8.4 per cent) also contributed to the price rises.

The data shows holiday travel and accommodation prices have actually fallen by 1.3 per cent over the last 12 months, driven by falls in domestic prices, despite the recent tour by American singer Taylor Swift.

“Although Taylor Swift performances saw hotel prices rise in Sydney and Melbourne, elsewhere accommodation and airfare prices fell in February due to the end of the peak travel during the January school holiday period,” said Michelle Marquardt, ABS head of prices statistics.

The ABS says within the housing category, “rents” are increasing annually by 7.6 per cent, up from 7.4 per cent in January.

It says those increases in rents reflect a tight rental market and low vacancy rates across the country. New dwelling prices have risen by 4.9 per cent over the last 12 months as builders pass through higher costs for materials and labour.

What does this mean for interest rates?

Economists say Wednesday’s inflation numbers cement the view that interest rate hikes are over, and justify last week’s move by the Reserve Bank from a hiking bias to a neutral one, opening up the prospect of rate cuts in future meetings.

“Today’s monthly CPI figures — with inflation in February remaining steady at 3.4 per cent — reaffirms KPMG’s view that the inflation surge is now over and, despite the RBA’s cautious ‘nothing’s off the table’ message, the next interest rate move will be down – the question now is just when,” noted KPMG’s chief economist Brendan Rynne.

“There appears to be a disconnect between the latest national accounts, which suggests we have an economy barely growing, and monthly labour market data that suggests the economy is still running hot.

“Over the next few months labour market data will be vitally important in clarifying which of these two divergent scenarios represents Australia’s real economic situation,” he said.

AMP’s deputy chief economist Diana Mousina agrees that unemployment will be the key issue the RBA looks at in coming months.

She said another measure of underlying inflation – which excludes volatile price moves – is now around the top of the RBA’s 2-3 per cent target when annualised over the past six months, while headline inflation was already near the bottom of the target range when annualised over the same period.

“The RBA has been looking for confirmation that inflation is headed to be comfortably within the RBA’s 2-3 per cent target band and the full set of the March quarter inflation data should provide the RBA the comfort that this is the case and therefore provide scope for the central bank to start cutting interest rates,” she wrote.

“We have been of the view that the first rate cut for this cycle would be in June.

“This is still our base case, but the risk is that rate cuts get pushed into August, if the domestic growth backdrop does not necessitate the need for rate cuts in June, with the key indicator to watch being the unemployment rate.”

Energy prices kept low by government rebates

Electricity prices rose by 0.3 per cent in the 12 months to February, compared to 0.8 per cent in January.

The ABS says price rises for electricity have continued to moderate after government rebates were introduced last year and kept in place.

Energy Bill Relief Fund (EBRF) rebates were introduced from July 2023 and they’ve kept prices low for households across the country.

Without the rebates, electricity prices would have jumped by 14.9 per cent in the 12 months to February.

But insurance prices are rising at record pace

But households are still facing surging insurance prices.

Insurance prices rose again in February, taking the annual rate of price increases from 16.3 per cent to 16.5 per cent.

It was the highest annual price movement for insurance since the beginning of the monthly CPI indicator.

The ABS says higher reinsurance, natural disaster and claim costs contributed to higher premiums for motor vehicle, house and home contents insurance.

Rents, cost of new dwellings, increasing

The importance of rents and new dwelling costs can’t be understated for inflation at the moment.

Commonwealth Bank economist Stephen Wu says both categories, combined, contributed just under half of the monthly increase in consumer prices last month.

The pace of rental price growth picked up again in February and is now running at 7.6 per cent annually.

Rents would have been 9.3 per cent higher over the past year if rent assistance was excluded.

“Higher rents are weighing on discretionary expenditure for many households,” Mr Wu said.

New dwelling costs rose by 4.9 per cent in the 12 months to February, which is broadly unchanged from the 5 per cent annual pace of the past six months.

“Capacity constraints and materials and labour costs are contributing to a higher and sustained run rate for new dwelling costs,” Mr Wu said.

“Underlying demand for housing is strong, reflected in population growth.”


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