Australia CPI Preview: Forecasts from six major banks, inflation could tick higher

We expect annual growth in the monthly CPI indicator to rise slightly to 3.6% YoY in January from 3.4% YoY in December. This is equivalent to a 0.2% MoM fall in the price level. Headline deflation is not uncommon in January, due to seasonal falls in prices for holidays, household goods, and clothing & footwear. Updated CPI weights will be published in this release, but we don't expect the changes will be as significant as in the past few years when spending patterns were more affected by the pandemic.

Being the first month of the quarter, the January CPI will predominately serve as an update on durable goods prices such as garments, furniture and furnishings, household textiles, household appliances (many of which are anticipated to fall) but very few services prices. Due to base effects, our forecast for a 0.1% MoM increase will see the annual pace lift from 3.4% to 3.9% YoY.

January’s inflation data will probably unwind some of the December decline, as we are not expecting a repeat of the big drop in prices that followed the December 2022 price spike. That should take inflation from 3.4% YoY to 3.7%, with a chance that it comes in even higher. With the RBA mulling the need for further possible rate hikes at their February meeting, the narrative on rates in Australia may shift from when and how much the RBA will start easing back to whether rates have peaked after all.

We expect January monthly CPI to rise to 3.7% YoY as the high base effects fade off and rising inflation pressures emerge from higher rents, insurance and utility bills. Jan has usually less surveyed items in the monthly indicator, so the print could be fairly volatile but the inflation risks are apparent which warranted the RBA to keep a hawkish stance at its Feb meeting. Services prices are unlikely to retreat quickly, jeopardising the RBA's goal of returning inflation back to target.

Monthly headline CPI inflation (YoY) for January (3.2%) is likely to fall further from December (3.4%), although the pace of decline should be much more gradual than in recent months. A continued decline in monthly headline inflation should further support our base scenario of no additional RBA rate hike and a series of policy rate cuts from 4Q24, although we are still concerned about the remaining upside risks to inflation, especially in the housing sector.

MoM inflation was likely flat in January, implying a 3.7% increase in year-ago terms though we see downside risks to their forecast, stemming largely from food inflation, which is expected to fall. Elsewhere, the key contributor to inflation will remain housing, with both rents and owner-occupier dwelling costs expected to rise further. The first month of the quarter tends to focus on goods prices. After a sharp fall in Q3, we expect a more mixed Q4 post Black Friday and X-mas sale events.