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Latest CPI Movements in Australia (and the role fuel is playing)

Here’s a quick update about how our wallets and bank accounts are going to be feeling once 2024 gets underway.

As you’re no doubt aware, the Reserve Bank of Australia raised interest rates multiple times over the last two years in an attempt to get inflation under control. Results have been slow to appear, which means there has been no choice but to keep pushing them higher. This has led to the ‘double-edged sword’ problem of rising costs and higher mortgage payments.

While a number of factors influence interest rate decisions, the consumer price index is one of them. Fortunately, the latest CPI results in Australia indicated that inflation is finally slowing down. And interestingly, it’s fuel prices that contributed most to the drop.

 

CPI figures for November 2023

The cash rate is currently sitting at 4.35 per cent, a 12-year high, with some economist predicting that the Reserve Bank of Australia (RBA) will raise it to 4.6 per cent in February.

However, the Australian Bureau of Statistics reported the monthly Consumer Price Index (CPI) indicator rose 4.3 per cent between January and November 2023. This is down from 4.9 per cent in October, indicating that the wind is dropping out of the sails of inflation.

Reduced fuel prices were a big factor in the results, with the ABS sharing that automotive fuel prices rose 2.3 per cent in the 12 months to November, down from the annual increase of 8.6 per cent in October. In monthly terms, automotive fuel prices fell 0.5 per cent as crude oil prices continued to soften, reaching a five-month low.

These lower costs for petrol may continue.. as reported by 9News, the USA is producing more oil than they ever have and that has led to the price drop at the bowser as other producers cut their cost per barrel in order to maintain market share.

Meanwhile, the average price of food and non-alcoholic beverages still rose 4.6 per cent in the 12 months to November, but there is a downwards trend; a 5.3 per cent annual increase was reported in October.

 

What will happen to interest rates in February and beyond?

It’s early days, but the recent fall in CPI means Australians may experience interest rate relief sooner rather than later.

Australia’s largest lender, the Commonwealth Bank, recently predicted that we will start to see interest rate cuts in 2024. The Chief Economist at CBA, Stephen Halmarick, said that interest rates should fall by as much as 0.75 percentage points in 2024 and then drop again in late 2025 to a more reasonable cash rate closer to 3.6 per cent.

In the more immediate future, the RBA is widely expected to hold interest rates as they are, and mortgage holders will be saved from a rate rise in February. Whether or not this continues will depend on factors including unemployment figures, local inflation and the global economy.

Expert predictions do seem to align with the Government’s macroeconomic outlook, which says the Treasury believes inflation in Australia peaked in late 2022, and that it will moderate as global price shocks and supply constraints continue to ease. According to the 2023/2024 Budget’s outlook, the CPI is forecast to decline from 6.0% in 2022–23 to 3.25% in 2023–24, bringing things much closer to the Reserve Bank’s target of between 2 and 3 per cent inflation.

From a global perspective, the economy does look set to remain sluggish throughout the year thanks to ongoing conflict around the world, continued challenges with supply chains and high levels of public debt. While Australia’s economy and resources put us in a good position, we are still impacted by global economic events.

In terms of fuel, the crisis in the Middle East may see prices start to rise again but it’s a ‘wait and see’ situation at the moment.

The February interest rates announcement is set for the first Tuesday of the month. Based on CPI figures, economists believe they will stay put, and some say we have even seen the last of the rises for this cycle. However, time will tell as there are a number of factors involved with the Reserve Bank’s decision.

 

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