Inflation rises to 2.3 per cent in November: Australian Bureau of Statistics data released

A fall in underlying monthly inflation from 3.5 per cent in October to 3.2 per cent in November has been leapt on by bond traders as a positive sign, potentially setting up a cut in interest rates in February.

Bond markets are now betting there is a 75 per cent chance of a rate cut at the next RBA meeting, up from 67 per cent previously.

Stripping out volatile components like electricity, underlying inflation appears on track with the RBA’s forecast of returning to the target band of between two and three per cent by the end of the year.

It opens the door for a rate cut at the RBA’s next deliberation on interest rates in February, potentially the last rates call before the election. November’s print is for the month, and can be more volatile however, which is why the RBA uses quarterly data in its deliberations.

Treasurer Jim Chalmers was encouraged by the prospect of a more benign inflation environment.

“From the government’s point of view, we’re very pleased to see underlying inflation come down. We’re very encouraged by the substantial and sustained progress we’ve made, seeing inflation moderate quite substantially over the last couple of years,” Dr Chalmers said.

“It has been some years since we’ve had inflation for four consecutive months within that target band, and the last three months, it has been at the lower half of the RBA target band.”

“Even when Australia is making this very welcome progress on inflation, we know that that doesn’t always translate into how people are feeling and faring in the economy,” Dr Chalmers said. “The main focus of this government has been and will continue to be, the cost of living, because we know people are still under the pump. What we see in these numbers today, whether it’s electricity or whether it’s rent or in other ways, can see that our policies are making a helpful contribution.”

The importance of government subsidies was revealed in the headline inflation figures which jumped to 2.3 per cent in November from 2.1 per cent on the previous month, as electricity rebates subsided. Stripping out government support for consumers, energy costs surged 22.4 per cent, the ABS found.

“The impact of the rebates was lower in November than October due to the timing of payments. Most quarterly electricity bills received in November included only one instalment of the Commonwealth Energy Bill Relief Fund, whereas many bills received in October included two instalments. As a result, electricity prices rose 22.4 per cent in the month of November,” Michelle Marquardt, ABS head of prices statistics said.

Accounting for the impact of rebates, electricity prices were 21.5 per cent lower in November, compared to a 35.6 per cent annual fall to October. What happens when those rebates expire will be a key concern, with underlying electricity inflation falling just 1.7 per cent in the 12 months to November.

RBA on target for soft landing

At last month’s press conference explaining why it kept rates on hold, RBA Governor Michele Bullock said the Bank is “gaining in confidence” that inflation will decline as forecast by 2026. That had markets increasing their bets of a rate cut in February, after previously pushing out expectations to mid-year.

“Members judged that the risk that inflation returns to target more slowly than forecast had diminished since the previous meeting and that the downside risks to activity had strengthened,” according to minutes from the last Board meeting.

“Potential labour supply was more abundant than had been assumed,” the RBA minutes said, and despite full employment at a 3.9 per cent unemployment rate, wage cost pressures demonstrated “better balance and inflation expectations remained anchored.”

Today’s figures have now increased investor confidence that the RBA can safely cut rates, although some market economists expect the Bank to continue to adopt a wait and see approach, particularly while services inflation remains elevated.

Tight rental markets continue to punish consumers, with rent inflation stuck at 6.6 per cent in the 12 months to November, following a similar annual figure of 6.7 per cent to October. Health, education, and insurance and financial services all showed elevated inflation.

“The RBA remains concerned about the stickiness of sector inflation and rightly so,” said Callam Pickering, APAC economist at global job site Indeed.

The ABS figures revealed food inflation is moderating, falling to 2.9 per cent from 3.3 per cent annualised in October, with favourable growing conditions helping ease the price rise in fruit and vegetables from 8.5 per cent last month to 6 per cent this month.

Job vacancies rise for first time since May 22

While the inflation figures are moving in favour of a rate cut, an unexpected rise in job vacancies for the quarter show the continued strength of the labour market and could prompt the RBA to keep rates on hold. Last quarter, vacancies had fallen 5.2 per cent from May suggesting to the RBA that there was more slack in the labour market.

The November period saw it strengthen, adding 14,000 new vacancies resulting in 344,000 unfilled positions, up 4.2 per cent.

“This was the first rise since May 2022, when job vacancies reached their historical peak,” Bjorn Jarvis, ABS head of labour statistics, said.

Vacancies grew in 14 of the 18 industries tracked by the ABS during the quarter, with the largest rises in customer-facing industries including arts and recreation services, up 28.5 per cent, and accommodation and food services, up 20.1 per cent.

On an annualised basis, job vacancies are down, led by a 37 per cent drop in manufacturing but despite the weak economic outlook, labour shortages still persist in many industries. Job vacancies are still 51 per cent higher than prior to the start of the pandemic.

The private sector is particularly affected with a 4.7 per cent rise in vacancies to 308,000, compared to a 0.4 per cent rise in public sector vacancies to 36,000.

“Australia’s job market remains incredibly tight, with the unemployment rate low and job vacancies still well above normal levels. The ongoing strength in the Australian job market means that the RBA can fully commit to achieving their inflation target without needing to worry about the job market unravelling,” Mr Pickering said.

“The market is convinced that rate cuts will arrive in early 2025. But for that to occur we will need to see more progress with regards to service sector inflation and ideally some indication that productivity growth is improving. Not enough progress has been made on that front for the RBA to be confident in their ability to a) return to their 2-3 per cent inflation target and, more importantly, b) stay there.”