Breaking: Australia’s CPI inflation rises 0.6% in Q4 vs. 0.8% expected

Australia's Consumer Price Index (CPI) arrives 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 rose 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 climbed to 3.4% YoY in December versus the 3.7% expected and the previous reading of 4.3% rise.

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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.”