Australia’s CPI inflation declines to 0.6% in Q4 vs. 0.8% expected

Australia’s Consumer Price Index (CPI) arrived at 0.6% in the fourth quarter of 2023, compared with the 1.2% increase seen in the third quarter, according to the latest data published by the Australian Bureau of Statistics (ABS) on Wednesday. The market consensus was for a growth of 0.8% in the reported period.

Annually, Australia’s CPI inflation fell to 4.1% in Q4 2023 from the previous print of 5.4% and below the market consensus of 4.3%.

The RBA Trimmed Mean CPI for Q4 rose 0.8% and 4.2% on a quarterly and annual basis, respectively. Markets estimated an increase of 0.9% QoQ and 4.3% YoY in the quarter to September.

The monthly Consumer Price Index inflation dropped to 3.4% YoY in December versus 3.7% expected and the previous reading of 4.3% rise.

Key takeaways from the Australian CPI report

“The most significant contributors to the rise in the September quarter were automotive fuel (+7.2%), rents (+2.2%), new dwellings purchased by owner occupiers (+1.3%) and electricity (+4.2%).”

The main contributors to the fall were Furniture (-4.3%) and Household Textiles (-5.3%).

AUD/USD reaction to the Consumer Price Index data

The AUD/USD pair attracts some sellers following the weaker than expected inflation data from Australia. The pair is losing 0.28% on the day to trade at 0.6583, at the press time.

AUD/USD: one-hour chart

Australian Dollar price in the last 7 days

The table below shows the percentage change of Australian Dollar (AUD) against listed major currencies in the last 7 days. Australian Dollar was the weakest against the Swiss Franc.

	USD	EUR	GBP	CAD	AUD	JPY	NZD	CHF
USD		0.10%	-0.03%	-0.43%	-0.06%	-0.60%	-0.48%	-0.90%
EUR	-0.11%		-0.14%	-0.55%	-0.20%	-0.71%	-0.61%	-1.01%
GBP	0.04%	0.14%		-0.41%	-0.04%	-0.57%	-0.47%	-0.88%
CAD	0.43%	0.58%	0.41%		0.36%	-0.16%	-0.06%	-0.46%
AUD	0.07%	0.19%	0.05%	-0.36%		-0.47%	-0.43%	-0.82%
JPY	0.60%	0.71%	0.58%	0.15%	0.55%		0.10%	-0.30%
NZD	0.50%	0.58%	0.45%	0.03%	0.42%	-0.09%		-0.42%
CHF	0.90%	1.00%	0.86%	0.46%	0.84%	0.30%	0.42%

The heat map shows percentage changes of major currencies against each other. The base currency is picked from the left column, while the quote currency is picked from the top row. For example, if you pick the Euro from the left column and move along the horizontal line to the Japanese Yen, the percentage change displayed in the box will represent EUR (base)/JPY (quote).

(This story was corrected on January 31 at 02:40 GMT to say, in the headline and the main body of the text, that Australia’s CPI inflation declined, not increased, on both quarterly and annual basis.)

This section below was published at 21:30 GMT as a preview of the Australian inflation data.

The Australian Monthly Consumer Price Index rate is foreseen at 3.7% YoY in December.
The Quarterly CPI inflation is expected to have eased further in the last quarter of 2023.
The Australian Dollar is bearish ahead of inflation figures and the upcoming RBA monetary policy decision.

The Australian Bureau of Statistics (ABS) will release two different inflation reports on Wednesday. On the one hand, the organism will publish the quarterly Consumer Price Index (CPI) for the last quarter of 2023, and on the other hand, the Monthly CPI, estimated annually, for December. Additionally, the quarterly report includes the Trimmed Mean Consumer Price Index, the Reserve Bank of Australia's (RBA) favorite inflation gauge.

The figures are critical ahead of the RBA monetary policy meeting on February 6, as the central bank aims to keep the annual CPI rate between 2% and 3%. Price pressures in Australia are clearly moving in the right direction, although they are still above the desired levels.

The central bank is expected to leave the Cash Rate unchanged at 4.35%, as it did in the December meeting, following a 25 basis points (bps) hike in November. Previously, the RBA had held rates steady for four consecutive months. The November decision resulted from the Board assessing inflation was easing at a slower pace than earlier forecast.

What to expect from Australia’s inflation rate numbers?

The ABS is expected to report that inflation was 3.7% YoY in December, down from the 4.3% posted in November. The quarterly CPI is foreseen rising 0.8% QoQ and up 4.3% YoY in the three months to December, while the RBA Trimmed Mean CPI rate is foreseen at 4.3% YoY, declining from the previous 5.2%.

The anticipated gauges would support an on-hold RBA, but it is too early to discuss rate cuts in Australia. In its latest Statement on Monetary Policy, which is published quarterly in February, May, August and November, policymakers forecasted that it will take until late 2025 for inflation to moderate to under 3%, finally falling into the target range.

“Inflation is forecast to decline to 3½ per cent by the end of 2024 and to reach a little below 3 per cent at the end of 2025. The forecast decline in inflation is more gradual than anticipated three months ago because domestic inflationary pressures are dissipating more slowly than previously thought,” according to the official document. Furthermore, it added: “Growth in the Australian economy is expected to remain below trend over 2023 and 2024 as cost-of-living pressures and higher interest rates continue to weigh on demand.”

Finally, the International Monetary Fund (IMF) advised Australia to lift interest rates further to achieve its inflation target before 2026.

In such a scenario, trimming the Cash Rate seems out of the table at the time. If anything, inflation-related figures need to decline much more than anticipated throughout the next few months to allow policymakers a rate-cut discussion. At least, it seems safe to say that rates have peaked.

It is worth adding that the market is moving ahead of policymakers. In early January, speculative interest was pricing in six rate cuts for 2024, with the Cash Rate expected at 3.75% by the end of the year. That means softer-than-anticipated CPI figures could boost rate-cut odds regardless of RBA’s ability to deliver them.

How could the Consumer Price Index reports affect AUD/USD?

CPI readings will have a significant impact on the Australian Dollar (AUD) as the figures will guide the RBA's upcoming monetary policy decisions. As usual, the wider the deviation of the outcome from expectations, the larger the price movement. Generally speaking, higher-than-anticipated numbers fuel expectations of rate hikes and tend to boost the AUD. On the contrary, softer-than-expected figures should fuel hopes for soon-to-come rate cuts, and weigh on the local currency, at least in the near term. As the dust settles, easing price pressures should be understood as good news, and end up benefiting the Aussie in the longer run.

From a technical perspective, AUD/USD trades in the 0.6580 region ahead of the events, after posting a weekly peak of 0.6624 on Tuesday. According to Valeria Bednarik, FXStreet Chief Analyst, “the risk skews to the downside in the daily chart. The pair is currently developing just above a directionless 200 Simple Moving Average (SMA), stuck around the indicator for a second consecutive week. Furthermore, the 20 SMA maintains a firmly bearish slope above the current level, providing dynamic resistance at around 0.6630. Finally, technical indicators stalled their recoveries within negative levels and are slowly resuming their slides, reflecting persistent selling interest.”

Bednarik adds: “Buyers are defending the downside in the 0.6550/60 region, with a break below it exposing the 0.6500 threshold. Below the latter, AUD/USD has scope to test a strong static support level at 0.6470. On the flip side, the pair needs to recover beyond the aforementioned 0.6630 to gain upward traction and approach the 0.6700 figure.”

Inflation FAQs

What is inflation?

Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.

What is the Consumer Price Index (CPI)?

The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.

What is the impact of inflation on foreign exchange?

Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.

How does inflation influence the price of Gold?

Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it.
Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.

Economic Indicator

Australia Monthly Consumer Price Index (YoY)

The Monthly Consumer Price Index (CPI), released by the Australian Bureau of Statistics on a monthly basis, measures the changes in the price of a fixed basket of goods and services acquired by household consumers. The indicator was developed to provide inflation data at a higher frequency than the quarterly CPI. The YoY reading compares prices in the reference month to the same month a year earlier. A high reading is seen as bullish for the Australian Dollar (AUD), while a low reading is seen as bearish.