The data released on Wednesday (February 26) showed that Australia's January Consumer Price Index (CPI) fell 0.2% month on month, with a year-on-year growth rate of 2.5%, and the core inflation indicator slightly increased. This data indicates that inflationary pressures have eased, which may pave the way for further interest rate cuts by the Reserve Bank of Australia. The slowdown in the real estate market and the decrease in holiday tourism are the main reasons for the decline in CPI, while the strong performance of the labor market remains the main concern for the central bank's decision-making.

Performance of CPI data

According to data from the Australian Bureau of Statistics, the January CPI decreased by 0.2% month on month, marking a significant decline from the 0.8% increase in December. The year-on-year growth rate remained at 2.5%, in line with market expectations. The core inflation indicator (CPI truncated mean) increased by 2.8% year-on-year, slightly higher than the 2.7% in December. Although the data only covers a portion of the CPI basket and mainly focuses on goods rather than services, its weak performance still alleviates market concerns about inflation stickiness.

Real estate and tourism drag down inflation

In January, housing prices rose by 2.0% year-on-year, the slowest increase since mid-2021, far below the peak of 22% in 2022. Rent increased by 0.3% month on month, but the annual growth rate dropped to 5.8%, lower than the peak of 7.8% in August 2023. Holiday tourism and accommodation prices have decreased by 6%, reflecting weak consumer demand. These factors collectively dragged down the overall inflation level.

Outlook for Australian Federal Reserve Policy

The Reserve Bank of Australia lowered interest rates by 25 basis points earlier this month, marking the first rate cut in over four years. However, the Reserve Bank of Australia is cautious about further easing policies, mainly due to the strong performance of the labor market, which may exacerbate cost pressures and hinder the core inflation rate from falling back to the middle of the target range. The swap market shows that the possibility of a rate cut in April is only 17%, but a rate cut in July is almost a certainty.

Analyst's viewpoint

Abhijit Surya, a senior Asia Pacific analyst at Capital Economics, pointed out that the weak January CPI data should alleviate the Australian Federal Reserve's concerns about inflation stickiness and provide room for further interest rate cuts. He expects that the central bank may gradually withdraw monetary restrictions in the coming months.

Summary:

The January CPI in Australia decreased compared to the previous month, indicating that inflationary pressures have eased, which has created conditions for further interest rate cuts by the Reserve Bank of Australia. Although the strong performance of the labor market remains a major concern for decision-makers, the slowdown in the real estate market and reduced tourism demand have significantly dragged down inflation. In the coming months, as economic data becomes clearer, the Reserve Bank of Australia may adopt more loose policies to support economic growth.

Affected by CPI data, the Australian dollar/US dollar fluctuated and weakened in the Sanya market on the week, falling 0.38% at one point and touching 0.6319, a new low since February 14th. Currently trading around 0.6324.