Australia’s underlying inflation rate has fallen to a three-year low of 3.2%, bolstering the case for a rate cut next month that would provide a dopamine hit to the government ahead of a cost-of-living election.
The Reserve Bank of Australia’s preferred inflation gauge, which strips out volatile price swings, fell to an annual 3.2% for the December quarter, down from 3.5%.
Economists had forecast that a 3.2% reading would be enough to trigger a rate cut next month, offering relief to mortgage holders and representing a vote of confidence that high inflation levels were being reined in.
The headline consumer price index, which includes government-rebated electricity bills, came in at an annual 2.4%, down from 2.8% at its last quarterly reading.
The official cash rate has sat at an elevated 4.35% since November 2023, while the last rate cut occurred in November 2020 as part of a policy to stimulate a pandemic-stricken economy.
While the inflation rate has not fallen as fast as central bankers had hoped, it has trended lower since its 2022 peak of 7.8%, when consumers grappled with runaway prices for essential goods.
Lower rates of inflation should convince the RBA to start relaxing its squeeze on the economy to avoid hurting the job market and triggering a recession.
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Polling is tight before Australia’s election, due by May, with unofficial campaigning under way. While most incumbent governments that faced voters last year lost power, those that won revealed aggressive policies designed to alleviate cost-of-living pressures.
The market was pricing in an 84% chance of a 25 basis-point rate cut next month ahead of Wednesday’s data release.
