The Consumer Price Index (CPI) in Australia has returned to the Reserve Bank of Australia’s (RBA) target range for the first time in over three years, according to the latest data from the Australian Bureau of Statistics (ABS). The CPI increased by a modest 0.2% in the September 2024 quarter, bringing annual inflation down to 2.8%, a drop from 3.8% in June. This marks the first time since the March 2021 quarter that inflation has been within the RBA's target range of 2–3%.

ABS head of price statistics, Michelle Marquardt, highlighted the significance of the 0.2% quarterly increase, the smallest since the June 2020 quarter during the COVID-19 outbreak, and noted that the annual inflation of 2.8% is the lowest since early 2021. Key drivers behind this cooling inflation were sharp declines in electricity prices (down 17.3%) and automotive fuel prices (down 6.7%). Marquardt attributed the drop in electricity costs to the 2024-25 Commonwealth Energy Bill Relief Fund, which provided rebates across Australia, along with state-level rebates in Queensland, Western Australia, and Tasmania. Without these rebates, she noted, electricity prices would have risen by 0.7% this quarter.

The Trimmed Mean CPI, which excludes extreme price changes to give a more stable view of inflation, showed annual inflation at 3.5% in the September 2024 quarter, down from 4.0% in June. Marquardt explained that the Trimmed Mean was unaffected by the significant price drops in electricity and fuel, resulting in a rate higher than the headline CPI.

Attention now turns to the RBA's response. However, based on recent comments from RBA Governor Michele Bullock, a swift policy adjustment seems unlikely. Bullock previously anticipated a temporary dip in headline inflation due to cost-of-living measures but maintained that a sustainable return to target levels would not occur until 2026. While acknowledging that headline inflation may decline for a period, she stressed that underlying inflation remains high and signals persistent inflationary pressures. Bullock confirmed that the RBA would keep policy sufficiently restrictive until there is strong evidence of inflation stabilizing within the target range.

Looking ahead, NAB senior economist Gerard Burg shared his perspective on the RBA's potential rate-cutting path during an NAB economic update. He suggested that the first rate cut may come as early as February 2025, earlier than the previously anticipated May start. Nonetheless, he emphasized that the end point is critical; he predicts the rate to stabilize around 3% by late 2026, a relatively low level historically but one he believes aligns with the current neutral rate for the economy.

Rick Maggi CFP, Westmount Financial, Financial Advisor (Perth)