Inflation Cools, But The Rate Debate Is Far From Settled

After months of stubborn price pressures, the latest inflation data has delivered a welcome surprise. Headline inflation eased more than expected in November, offering some relief to households and borrowers who have been bracing for further interest rate pressure.

The consumer price index rose 3.4 per cent over the year to November, down from 3.8 per cent the month prior. While this marks a clear step in the right direction, inflation remains above the Reserve Bank’s target band, and uncertainty around the February rate decision has not disappeared.

A Softer Print, But Not A Turning Point Yet

The November result was stronger than economists had forecast, with underlying inflation also edging lower. The trimmed mean eased to 3.2 per cent, down slightly from 3.3 per cent in October.

Markets initially responded by pushing the Australian dollar lower, before reversing course later in the day. Importantly, expectations around interest rates barely moved. According to Bloomberg pricing, markets still see a 37 per cent chance of a rate hike at the RBA’s February meeting.

One reason for the muted reaction is that the monthly CPI is still a relatively new data set. While it provides useful insight, the RBA continues to place greater weight on quarterly inflation when assessing underlying momentum.

As Westpac chief economist Luci Ellis noted, much of the volatility in the data is being driven by temporary factors.

“There is a lot of noise in the data at the moment,” Ellis said, pointing to electricity prices and the impact of government rebates rolling on and off.

Electricity Prices Drive The Slowdown

A key contributor to the cooling in inflation was a sharp slowdown in electricity price growth. Annual electricity inflation fell to 19.7 per cent in November, down from 37.1 per cent in October, reflecting changes in rebates and pricing dynamics.

More broadly, annual goods inflation eased to 3.3 per cent, while services inflation also moderated, falling to 3.6 per cent from 3.9 per cent the previous month. October’s services figure had been inflated by strong travel demand during the school holiday period.

Housing remains the largest contributor to inflation, rising 5.2 per cent over the year. Food and non alcoholic beverages increased 3.3 per cent, while transport rose 2.7 per cent.

Despite the improvement, some economists warn that the more persistent components of inflation are still running hotter than the RBA would like. NAB chief economist Sally Auld said:

“There are still signs some of the more persistent aspects of inflation, particularly rents and construction costs, are lingering."

February Still In Play

The RBA meets again in February, and will receive another full set of inflation data before then. The December quarter CPI, due in late January, will be far more influential in shaping the Board’s decision.

Major banks remain split. Commonwealth Bank and NAB continue to expect a twenty five basis point hike, while ANZ and Westpac are forecasting rates to remain on hold at 3.6 per cent.

Even economists who favour a pause acknowledge the risk of further tightening has not disappeared. HSBC chief economist Paul Bloxham noted that trimmed mean inflation at 3.2 per cent is still too high to be considered consistent with the RBA’s target.

The result is a finely balanced outlook where both outcomes remain possible.

What This Means For Borrowers

The November inflation print is encouraging, but it is not decisive. Inflation is still above target, the RBA remains cautious, and markets continue to price a meaningful chance of higher rates.

With this level of uncertainty, it may be timely for borrowers to review their interest rate exposure. Fixed rates have eased from their peaks and remain relatively attractive in parts of the market. For some households, fixing a portion of debt can provide certainty and protection against short term volatility, while retaining flexibility on the remainder.

As always, the right approach depends on cash flow, risk tolerance and broader financial strategy.

The next inflation release will carry significant weight. Until then, the February meeting remains very much in play.

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