The headline monthly CPI indicator in October 2024 held at 2.1% year-on-year.
This was below the market consensus of 2.3%, and is the equal slowest pace since March 2021. The latest release is well down from the 4.9% year-on-year pace of 12 months ago.
Utility subsidies mask stubborn underlying inflation trend
However, it is important to note that government subsidies have materially lowered headline inflation in recent months. Indeed, the electricity utility prices component of the CPI is down a hefty 36% in year-on-year terms. As a result, electricity subsidies have lowered headline inflation by ~-70bps in the 12 months to October.
While the drop in headline inflation is good news for households, the Reserve Bank of Australia (RBA) will look through the headline inflation figures and focus on the trimmed mean measure as the best guide to underlying inflation trends.
Here the news is much less encouraging, with the monthly trimmed mean rebounding to 3.5% year-on-year from 3.2%. This is the fastest level since July 2024, and was an upside surprise relative to market expectations. Overall, the October CPI outcome suggests there is no convincing evidence of genuine downward momentum in underlying inflationary pressure.
All Eyes on December Quarter Inflation in January
While the monthly pick-up in underlying inflation will be noted by the RBA, the big test for its inflation view will be the December quarter inflation figures due at the end of January next year. The quarterly figures are based on a more comprehensive sample of consumer price trends than the monthly estimate, and are therefore more closely followed by the RBA.
For the latest September Quarter inflation print, the all-important ‘trimmed mean’ measure came in at 0.8% quarter-on-quarter and 3.5% year-on-year. This was in line with both RBA and market expectations, but is still too high for the RBA’s comfort.
The RBA’s forecast for the December Quarter 2024 trimmed mean is 3.5% year-on-year, which will require a 0.8% quarter-on-quarter outcome. This seems a reasonable expectation, although the RBA would likely perceive 0.7% (2.8% annualised) as evidence of genuine “progress” towards its target zone of 2-3%.
RBA Has Raised the Bar for a Rate Cut
Indeed, in its recent commentary, the RBA appears to have raised the bar for a rate cut. The RBA said in its November board minutes this month that it wants to see a significant decline in inflation sustained over more than one quarter.
“Members noted that this (a faster decline in inflation than forecast) could warrant an easing in the cash rate target, but that they would need to observe more than one good quarterly inflation outcome to be confident that such a decline in inflation was sustainable”.
With underlying inflation running at an annual rate of 3.5%, RBA governor Michele Bullock also signalled that she did not view the September quarter inflation figures as “good”, meaning the December quarter figures on their own will not be enough to sway the board to cut the cash rate.
"If we were continuing to get 0.8s as quarterly [trimmed mean inflation], that’s not taking us back into the [2 to 3 per cent inflation target] band,"
Michele Bullock - RBA governor
Thus, with the most recent September quarter figures still running on the high side of the RBA’s target, this new guidance appears to rule out a February cash rate cut, unless there was an unexpected deterioration in the jobs market bringing into play the RBA’s dual mandate of both price and employment stability.
RBA relaxed about aggregate labour market conditions
At present, the labour market continues to look robust, with solid year-on-year employment growth and relatively low and stable unemployment. Of course, digging deeper shows that most of the jobs growth is coming from what economists call “non-market services sectors.” These are sectors directly or indirectly linked to the government, such as aged care, childcare, healthcare and the general public service. Excluding these sectors reveals a much more tepid “private sector” labour market. However, from the RBA’s perspective jobs are jobs, and the solid aggregate state of the labour market has them in no hurry to ease policy, particularly when underlying inflation is still annualising above target.
After the Australian Bureau of Statistics (ABS) releases the December quarter consumer price index on January 29, they will not release another set of quarterly figures until April 30. This means there will not be two quarterly inflation prints available to potentially meet the RBA’s new hurdle until its May 20 meeting.
| Labour Sectors | Aug 24 YoY Growth | Percentage of Total Workforce |
| Education and Training | 10% | 9% |
| Accommodation and Food Services | 6% | 7% |
| Administrative and Support Services | 6% | 3% |
| Health Care and Social Assistance | 5% | 16% |
| Public Administration and Safety | 5% | 7% |
| Employed total | 3% | 100% |
| Other Services | 2% | 4% |
| Construction | 1% | 9% |
| Professional, Scientific and Technical Services | 0% | 9% |
| Retail Trade | 0% | 9% |
| Transport, Postal and Warehousing | -3% | 5% |
| Financial and Insurance Services | -4% | 4% |
| Manufacturing | -4% | 6% |
| Wholesale Trade | -5% | 3% |
Source: Australian Bureau of Statistics, Labour Force, Australia, Detailed August 2024.
Australian Equities Economic View a Bit Too Rosy?
Hence, without a notable weakening in the labour market over the next few months, the earliest rate cut opportunity appears to be May. This is on the basis that the quarterly CPI improves in both Q4 ‘24 and Q1 ‘25. We think this is quite possible, but there is no guarantee of it. An additional consideration for the RBA is the likelihood of some additional stimulus in the run-up to the federal election, due by May 17 at the latest.
The futures market has only two cuts by the end of next year. This modest easing expectation seems reasonable, given low unemployment and the prospect of some pre-election fiscal stimulus next year. Global factors - most obviously Trump’s expected policy platform (particularly tariff policy) may potentially influence the path of our domestic monetary policy into 2026. For now, a delayed and shallow easing cycle looks to be the most likely central case for Australia.
From this perspective, the local share market looks optimistically priced against what is only likely to be a modest improvement in growth momentum in calendar year 2025.
Further down the track, significant uncertainty surrounding global conditions in 2026 (given the tail risks posed by Trump’s policy initiatives) and China’s uncertain economic outlook present additional tail risks for equities. We believe a well-diversified portfolio approach, including a significant allocation to high quality unlisted/uncorrelated assets, makes sense at the current juncture.
Written by
David Cassidy, Head of Investment Strategy
David is one of Australia’s leading investment strategists.
About Wilsons Advisory: Wilsons Advisory is a financial advisory firm focused on delivering strategic and investment advice for people with ambition – whether they be a private investor, corporate, fund manager or global institution. Its client-first, whole of firm approach allows Wilsons Advisory to partner with clients for the long-term and provide the wide range of financial and advisory services they may require throughout their financial future. Wilsons Advisory is staff-owned and has offices across Australia.
Disclaimer: This communication has been prepared by Wilsons Advisory and Stockbroking Limited (ACN 010 529 665; AFSL 238375) and/or Wilsons Corporate Finance Limited (ACN 057 547 323; AFSL 238383) (collectively “Wilsons Advisory”). It is being supplied to you solely for your information and no action should be taken on the basis of or in reliance on this communication. To the extent that any information prepared by Wilsons Advisory contains a financial product advice, it is general advice only and has been prepared by Wilsons Advisory without reference to your objectives, financial situation or needs. You should consider the appropriateness of the advice in light of your own objectives, financial situation and needs before following or relying on the advice. You should also obtain a copy of, and consider, any relevant disclosure document before making any decision to acquire or dispose of a financial product. Wilsons Advisory's Financial Services Guide is available at wilsonsadvisory.com.au/disclosures.
All investments carry risk. Different investment strategies can carry different levels of risk, depending on the assets that make up that strategy. The value of investments and the level of returns will vary. Future returns may differ from past returns and past performance is not a reliable guide to future performance. On that basis, any advice should not be relied on to make any investment decisions without first consulting with your financial adviser. If you do not currently have an adviser, please contact us and we would be happy to connect you with a Wilsons Advisory representative.
To the extent that any specific documents or products are referred to, please also ensure that you obtain the relevant disclosure documents such as Product Disclosure Statement(s), Prospectus(es) and Investment Program(s) before considering any related investments.
Wilsons Advisory and their associates may have received and may continue to receive fees from any company or companies referred to in this communication (the “Companies”) in relation to corporate advisory, underwriting or other professional investment services. Please see relevant Wilsons Advisory disclosures at www.wilsonsadvisory.com.au/disclosures.