Steady headline inflation masks underlying price pressures
While Australia’s annual Consumer Price Index (CPI) in January 2025 was unchanged from the previous month’s reading of 2.5%, core inflation measures showed a slight uptick, raising questions about the pace of future interest rate cuts.
The CPI excluding volatile items such as fruit and vegetables, automotive fuel, and holiday travel climbed 2.9% in January – marking an increase from 2.7% in December and 2.8% in November. Annual trimmed mean inflation went up by 2.8% in January, up from 2.7% in December and down from 3.2 per cent in November.
These figures, according to Real Estate Institute of Australia (REIA) president Leanne Pilkington (pictured above left), are still in line with market expectations and are trending towards the RBA’s target range.
“As the monthly CPI indicator is not as comprehensive as the ABS’s quarterly inflation data, some volatility around the trend line can be expected,” she said.
'Annual CPI inflation at 2.5% in January was the same as it was in December 2024,' Michelle Marquardt, ABS head of prices statistics
— Australian Bureau of Statistics (@ABSStats) February 26, 2025
For more, see https://t.co/4p1TkcLivs pic.twitter.com/k7HHws4Ijw
Key contributors to inflation included housing, which rose by 2.1%, food and non-alcoholic beverages, which climbed by 3.3%, and alcohol and tobacco, which increased by 6.4%. Rents rose by 5.8% in the year to January — down from 6.2% in December — marking the smallest annual rise since April 2023. Pilkington said this slowdown reflects higher vacancy rates in most capital cities.
“The consistent downward trend in the figures support market expectations of further rate cuts during 2025 which would provide additional relief for borrowers following the cut this month,” Pilkington said.
However, Canstar data insights director Sally Tindall (pictured above right) struck a more cautious tone.
“Core inflation is now heading in the wrong direction, according to the ABS monthly dataset,” she said. “While this is not cause for panic, it pours at least a bit of cold water on the prospect of further cash rate cuts in the near future.”
Tindall also pointed out that while major banks such as CBA, Westpac and NAB still forecast three more cuts by year-end, the Reserve Bank of Australia (RBA) may hold rates steady until the second half of the year if inflation remains stubborn.
“Borrowers should concentrate on what to do with the relief from this first rate cut, and refrain from baking further ones into their budget,” she said.
From Feb. 28, variable mortgage holders at CBA, NAB, and ANZ will see their interest rates reduced following last week’s RBA rate cut to 4.10%. However, these lenders will not automatically adjust customers’ direct debits — borrowers will need to contact their banks to benefit from lower repayments.
Westpac and Macquarie customers, whose direct debits are automatically adjusted if they pay the minimum, are expected to see repayment reductions by April.
RBA governor Michele Bullock recently acknowledged the central bank had been “arguably late raising interest rates on the way up,” and suggested that future cuts would depend on additional economic data.
Internationally, the US Federal Reserve has also held rates steady, citing solid employment figures and rising inflation — factors that may influence the RBA’s cautious approach in the coming months.
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