Australia's Inflation Drops to 3.6% in April 2024, Stronger Than Expected

Australia's annual inflation rate fell to 3.6% in April 2024, down from 4.1% in the previous month, according to Warren Hogan, the Managing Director of EQ Economics. This decline was stronger than expected, surprising investors and economists who had anticipated a more modest drop to around 3.5%.

The quarterly consumer price index (CPI) rose 1% in the first three months of 2024, higher than the 0.8% increase forecast by economists. The Reserve Bank of Australia's (RBA) closely watched core inflation gauge, the trimmed mean, also rose 4%, exceeding forecasts.

The higher-than-expected inflation numbers have concerned the RBA, which has paused its rate-tightening cycle after raising the cash rate to 4.25%. The central bank is unlikely to lower rates until underlying inflation eases and the tight labor market shows signs of improvement.

While inflation is moderating, services inflation and non-tradeable inflation, including rents, education, and insurance, remain high, which will be a concern for the RBA. The data suggests that inflation may be above the RBA's expectations by mid-year, reducing the probability of a rate cut in 2024.

Why this matters: The stronger-than-expected inflation data has reinforced the case for the RBA to hold interest rates at a 12-year high next month. The divergence between tradable and non-tradable goods prices, with non-tradable goods inflation primarily driven by domestic demand, remains a challenge for policymakers.

Treasurer Jim Chalmers acknowledged that price pressures are lingering but said that inflation has almost halved since the Labor government took office. The upcoming budget will focus on easing the cost of living pressures. Economists at major banks have deferred their rate cut forecasts following the CPI reading, with analysts warning that ongoing risks, such as supply chain issues and a tight labor market, will make further declines in inflation challenging.

"Welcome and encouraging progress is being made," Treasurer Jim Chalmers noted while emphasizing that inflation remains persistent. The RBA has expressed concern about the stickiness of service prices in Australia and the potential for inflation expectations to become unmoored. The central bank has raised interest rates by 4.25 percentage points between May 2022 and November 2023, and the latest CPI report suggests policymakers may have more work to do to cool prices.

Key Takeaways

• Australia's annual inflation rate fell to 3.6% in April 2024, down from 4.1%.
• Quarterly CPI rose 1% in Q1 2024, higher than the 0.8% forecast by economists.
• RBA's core inflation gauge, trimmed mean, rose 4%, exceeding forecasts.
• Inflation remains high in services, non-tradeable sectors, reducing rate cut prospects.
• RBA may need to further raise rates to cool persistent inflation pressures.