Inflation in ‘freefall’: November CPI indicator rose 4.3%

Economist declares inflation battle won, recession looms

Inflation in ‘freefall’: November CPI indicator rose 4.3%

Fuelled by the RBA’s hawkish interest rate rising cycle, inflation has continued its decline towards the central bank’s target band of 2%-3%.

The monthly Consumer Price Index (CPI) indicator rose 4.3% in the 12 months to November 2023, according to the latest data from the Australian Bureau of Statistics (ABS) - down from 4.9% in October.

Michelle Marquardt (pictured above left), ABS head of prices statistics, said this marked the smallest annual increase since January 2022.

Stephen Koukoulas (pictured above right), managing director of Market Economics, said it's "great news" that the free-fall in inflation is continuing, with the inflation rate in annual terms dropping to 4.3% in the year to November down from 8.4% at the end of 2022.

“Four percentage points is a big, big decline in inflation.”

However, Koukoulas warns the RBA must now “tread a careful path” to avoid a recession and “sharply higher unemployment”.

“The way to do this is to start cutting interest rates – soon.”

What drove inflation in November?

Perhaps the biggest driver of the latest inflation figures has been automotive fuel prices, which rose only 2.3% in the 12 months to November, down from the annual increase of 8.6% in October.

In monthly terms, automotive fuel prices fell 0.5% as crude oil prices continued to soften, reaching a five-month low.

"Annual inflation for automotive fuel has fallen from 19.7% in September 2023 to 2.3% in November. This has been a significant contributor to the lower annual rise in the monthly CPI indicator over the past two months," Marquardt said.

On the other side, the most significant contributors to the November annual increase were housing (+6.6%), food and non-alcoholic beverages (+4.6%), insurance and financial services (+8.8%) and alcohol and tobacco (+6.4%).

"CPI inflation is often impacted by items with volatile price changes like automotive fuel, fruit and vegetables, and holiday travel. It can be helpful to exclude these items from the headline CPI to provide a view of underlying inflation,” Marquardt said.

“When excluding these volatile items from the monthly CPI indicator, the annual rise in November was 4.8%, lower than the annual rise of 5.1% in October.” 

Housing’s increase was up from the 6.1% annual increase in October as new dwelling prices rose 5.5% over the year, reflecting higher labour and material costs.

Rent prices rose 7.1% in the 12 months to November, reflecting low vacancy rates and a tight rental market.

“The increase in Commonwealth Rent Assistance has reduced out-of-pocket rent costs for eligible tenants since its introduction on September 20, 2023. Excluding these changes to rent assistance, rents would have increased 8.8% over the year to November 2023,” Marquardt said.

Could the RBA’s inflation band be met by February?

With inflation down 4.1 percentage points in just 11 months, all eyes turn to the December monthly data to be released on January 31.

Koukoulas said if the month-on-month rise is 0.3%, which it could be given the drop in petrol prices, annual inflation will be 3.0% - back to the RBA’s target.

“The inflation problem is over. The RBA was concerned about inflation and their subsequent tightening of interest rates has worked,” Koukoulas said. “If you hike interest rates aggressively and crunch the economy, then yes, it’s going to fall. And it’s happened.”

“Now the debate has switched to can the RBA avoid a nasty recession, a weak economy, and unemployment rising to above 5%. We will see in the coming months.”

Do you think inflation is over? Comment below.

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