CPI inflation falls for second consecutive month

A sharper than expected fall in annualised inflation has supported mounting expectations of a pause to the Reserve Bank’s monetary policy tightening cycle. 

According to the Australian Bureau of Statistics’ (ABS) latest monthly consumer price index (CPI), annualised inflation fell for the second consecutive month to 6.8% in February — below market expectations. 

This represented a 0.6% decline from the previous month, in which annualised inflation was reported at 7.4%. 

The monthly decline was 1.6% below the peak of 8.4% in December. 

The monthly CPI result was expected to influence the Reserve Bank of Australia’s (RBA) next monetary policy board decision, along with the latest retail sales figures and business indicators. 

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The ABS released retail sales figures for the month of February earlier this week, revealing a 0.2% increase, down from a 1.8% rise in January. 

Except for the latest labour force data — reporting a seasonally adjusted unemployment rate of 3.5%, down from 3.7% in January —other periodic economic indicators suggest the economy is weakening. 

Wages grew 0.8% in the three months to 31 December, slowing from 1.1% in the previous quarter and falling below market expectations of a 1% rise. 

This coincided with weakness in aggregate economic activity, with GDP growth slowing to 0.5% over the fourth quarter of 2022 — below market expectations of 0.8%.

Markets are increasingly expecting the RBA to pause its tightening cycle when the board meets next week (4 April), particularly amid further evidence of a broader slowdown in the economy. 

Following the central bank’s last cash rate decision, RBA governor Philip Lowe hinted at a near-term pause.  

“We are closer to a pause and it’s a matter of logic really, as you increase interest rates higher you get closer to the point where it is appropriate just to stop for a while and just assess the flow of data,” he told the AFR Business Summit on 8 March. 

“We’ve done a lot in a short period of time and at some point, it’s going to be appropriate to sit still and assess the collective effects of that.”

Lowe said the board would carefully assess key economic data to be released ahead of the next board meeting, making specific reference to monthly employment, inflation, retail spending, and business indicators.  

“If collectively, they suggest that the right thing is to pause, then we’ll do that. But if they suggest that we need to keep going, then we will do that,” he added. 

“So, we’ve got a completely open mind about what happens at the next board meeting.”

Since his remarks earlier this month, the global financial system has been marred with significant uncertainty following the collapse of three US banks and the demise of Swiss giant Credit Suisse. 

The US Federal Reserve and the Swiss National Bank moved to bolster liquidity in the banking sector, with the bank failures largely attributed to poor capital management exposed by aggressive monetary policy tightening. 

This instability in the global banking system is also expected to weigh on the RBA’s upcoming decision, with the Fed recently softening its stance.  

“Prior to the banking turmoil coming along, the RBA was already considering a pause at the April meeting,” AMP Capital chief economist Shane Oliver told InvestorDaily. 

“It was in the minutes [and] governor Philip Lowe referred to it several weeks ago. 

“If they were considering a pause back then, now that we’ve got the banking turmoil, you can argue the case for a pause is stronger.”