CPI Trends: What They Mean For Cash Rate in 2024

The Consumer Price Index (CPI) is a vital economic indicator that measures the average change over time in prices paid by consumers for a typical basket of goods and services – such as groceries and transport.

The CPI reflects household inflation and is used to gauge changes in the cost of living. It tracks price movements for various categories, such as food, housing, transport and healthcare. The Reserve Bank of Australia (RBA) uses CPI data to shape monetary policy, particularly cash rate decisions.

---

The Key Role of CPI In Monetary Policy

The RBA relies on CPI data to assess inflation trends and make informed decisions regarding the cash rate. The RBA’s primary goal is keeping inflation within the target range of 2-3%, and CPI data is crucial in this evaluation. When CPI inflation is higher than that, the cash rate target tends to go up, when CPI falls beneath the preferred range, the target tends to go down.

The RBA raised the cash rate target 25 basis points, to its current 4.35%, in November 2023. But as late as February 2024, at least one major bank was still predicting the first rate cut of the next cycle would be in September of this year.

Unfortunately, after the March quarter of 2024, Australia’s CPI still indicated a stubbornly high year-over-year inflation rate of approximately 3.6%. For policymakers, this highlighted ongoing inflationary pressures in the economy. Hopes for a near-term rate cut began to diminish.

---

And inflation remains stubborn. RBA Governor Michele Bullock said in June, “Inflation has fallen substantially since its peak in 2022, as higher interest rates have been working to bring aggregate demand and supply closer towards balance. But the pace of decline has slowed in the most recent data, with inflation still some way above the midpoint of the 2–3 per cent target range. Over the year to April, the monthly CPI indicator rose by 3.6 per cent in headline terms, and by 4.1 per cent excluding volatile items and holiday travel, which was similar to its pace in December 2023.”

Here’s when the economists from major banks are now predicting the RBA could reduce its cash rate:

• ANZ: Anticipates a rate cut in February 2025
• CBA: Anticipates a rate cut in November 2024
• NAB: Anticipates a rate cut in May 2025
• Westpac: Anticipates a rate cut in November 2024

What’s Next?

We await the RBA’s decision on 6 August 2024. The ABS is set to release CPI data on 31 July 2024, which will influence the RBA’s decision on the August 2024 cash rate.