Dwelling prices contribute to easing core inflation
Westpac has updated its forecasts for Australia’s December quarter Consumer Price Index (CPI), projecting a quarterly increase of 0.3% and an annual rate of 2.5%.
The bank’s Monthly CPI Indicator near-cast for December stands at 0.9% month-on-month and 2.5% year-on-year, influenced by government energy rebates and cost-of-living assistance. These measures have helped bring headline inflation closer to the Reserve Bank of Australia’s (RBA) target range.
Justin Smirk (pictured above), senior economist at Westpac, said electricity prices, dwelling prices, and rental trends were key drivers in shaping the updated estimates.
The bank’s trimmed mean inflation estimate for the quarter remains at 0.6%, with the annual pace easing to 3.3% from 3.5%. However, the six-month annualised rate for the trimmed mean has dropped to 2.7%, indicating slower inflation momentum. Smirk noted that both CPI and trimmed mean figures carry “modest downside risks” due to rounding adjustments.
Westpac estimates that government energy rebates, increased rental assistance, and public transport fare subsidies reduced headline CPI growth by 0.3 percentage points and trimmed mean inflation by 0.1 percentage points in the December quarter.
Smirk highlighted a stronger-than-expected rise in electricity prices during November, which led to an upward revision of Westpac’s December quarter CPI forecast.
“Due to the larger-than-expected jump in electricity prices in November, and given we are unlikely to see a full reversal in December, we had to revise up our electricity estimate,” he said.
However, the fall in dwelling prices offset some of the inflationary pressure from energy costs. Smirk said dwelling prices — covering both new builds and renovations — dropped 0.6% in November following minor fluctuations earlier in the quarter. The Australian Bureau of Statistics attributed the decline to “builders offering discounts and promotional offers to entice business.”
Meanwhile, rental price growth moderated to 0.6% per month by the September quarter, after increasing at an average rate of 0.7% per month during the first half of 2023. Smirk noted that the indexation of Commonwealth Rental Assistance briefly affected trends but expected a return to 0.6% growth for December. For the quarter, rental prices are projected to rise 0.6%, a marked slowdown from the 1.6% increase in the September quarter.
This moderation in rental inflation, combined with declining dwelling prices, is expected to contribute to softer core inflation.
“The decline in dwelling prices will be included in the trimmed mean and is an important part of the story behind the moderation in core inflation,” Smirk said.
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