Australia's inflation cools to two-year low, signaling RBA rate hikes may be over

Australia's inflation rate dropped to 4.3% in November, marking the slowest climb in prices since January 2022. The figure arrived on Wednesday morning as a relief to policymakers who have spent the past two and a half years raising interest rates to cool an overheating economy. Economists had predicted 4.4%, so the actual result beat expectations and reinforced a growing conviction among investors and analysts that the Reserve Bank's aggressive campaign of rate increases—thirteen in total since May 2022, the fastest pace in thirty years—has finally done its job.

Treasurer Jim Chalmers acknowledged the progress but stopped short of declaring victory. Inflation remained higher than the government wanted, he said, though Labor's policies were helping to push prices down. The work was not finished; people were still under pressure. The statement captured the delicate position the RBA now occupies: the medicine has worked, but the patient is not yet well.

The details beneath the headline number told a story of uneven relief. Housing costs continued their relentless climb, up 6.6% over the year, with rents accelerating to 7.1% annually in November. Without the government's increase to Commonwealth Rent Assistance in September, rents would have risen 8.8%. Insurance premiums jumped 16.3%, the fastest pace since the ABS began tracking monthly figures, driven partly by rising costs from weather disasters. Food prices rose 4.6%, and financial services were 8.8% more expensive. Yet fuel prices finally offered respite. Automotive fuel was only 2.3% higher than a year earlier, a dramatic deceleration from October's 8.6% and September's punishing 19.7%. Michelle Marquardt, the head of prices statistics at the Australian Bureau of Statistics, identified this easing at the bowser as a significant factor in the overall slowdown over the past two months.

Other categories showed surprising weakness. Meat and seafood prices rose just 0.2% annually, a point of contention for farmers and politicians who argued that retail prices should be falling faster given the sharp decline in wholesale costs as farms began destocking in late 2023. Holiday travel and accommodation actually fell 0.3% in price, as did furnishing and household equipment—the only two groups cheaper than a year earlier. Electricity prices remained elevated at 10.7% higher than November 2022, though the government's energy bill relief fund had masked what would otherwise have been a 19% increase since June. Gas prices climbed 12.9%.

When economists strip away the most volatile items, the picture becomes clearer. The trimmed mean inflation measure, which the RBA watches closely, fell to 4.6% annually in November, down sharply from 5.4% in September and 5.3% in October. This measure is considered a better guide to underlying price pressures than the headline figure alone. The monthly CPI excluding volatile items also declined, to 4.8% from 5.1% in October.

Markets responded with measured confidence. Investors were pricing in less than a 10% chance of a fourteenth rate hike, according to the ASX rates tracker. Instead, they were fully pricing in a 25 basis-point rate cut to 4.1% as the RBA's next move, expected by September. David Bassanese, chief economist for BetaShares, said his base case was that the quarterly CPI figures due on January 31 would not be bad enough to force the RBA to revise its inflation forecasts upward. That meant the central bank would likely hold rates steady in February and had probably finished raising them altogether.

The November data came with a caveat: monthly figures offer only a partial snapshot compared with the quarterly numbers that will arrive later in the month. But the direction was unmistakable. Inflation, which had peaked at 8.4% in December 2022, had been trending lower for more than a year. The RBA's campaign of rate increases, the fastest in three decades, appeared to be achieving its intended effect. What happens next depends on whether that downward momentum holds when the full quarterly picture arrives.