Decreasing inflation. Rising Sentiment

The latest Consumer Price Index (CPI) data revealed a notable decrease in inflation, dropping from 5.4% in September 2023 to 4.1% for the December 2023 quarter.?

This decline represents the fourth successive quarter of annual inflation reduction, coming in under the Reserve Bank of Australia's (RBA) November prediction of 4.5%.

The decrease in inflation is indicative of reduced economic demand, evident in sectors like retail, where there's been a downturn. Additionally, there's been a slight drop in job openings and a gradual increase in unemployment since the latter part of 2022.

A key positive aspect of this decrease in inflation is its potential impact on monetary policy.?

As inflation continually falls below expectations, it strengthens the argument for maintaining stable interest rates in the upcoming week and potentially reducing them as the year progresses. This played out as the Reserve Bank of Australia (RBA) held the cash rate steady at 4.35% in their monthly meeting this week.

Lower interest rates could stimulate the housing market. Despite strong fundamental demand in the rental sector, the market for home purchases has been affected by high-interest costs and limited borrowing capacity.?

While the RBA may not favour an overly buoyant housing market if interest rates decrease, purchases of existing dwellings don't directly influence inflation statistics. Furthermore, other macro-prudential measures can be applied to maintain responsible housing lending.

Back to the numbers…

Regarding the CPI, housing accounts for approximately 22% of the CPI basket, making it the most significant component in inflation calculations. The primary elements within the housing sector of the CPI are changes in costs for new home construction and major renovations by homeowners, as well as variations in rent payments to landlords.

For new home purchases, the CPI figure has slightly decreased to 5.1% from 5.2% in the previous quarter, with a high of 20.7% in the year leading up to September 2022.?

Although the rate of increase is diminishing, residential construction continues to be a major factor in overall inflation, especially in this quarter, with elevated labour and material costs impacting new home prices.

The annual increase in CPI's rent component was 7.3% for the December quarter, down from 7.6% in the September quarter. This marks the first sign of a slowdown in rent inflation in over two years.?

Historically, the CoreLogic rent value index has been a precursor for the rent component of the CPI. With the peak of CoreLogic's rent value growth in early 2023, the beginning of a decrease in rent growth is not unexpected. However, the current annual growth rate of 7.3% remains significantly higher than the pre-pandemic decade average of 2.3%.

So, what does this all mean??

Inflation remains above the RBA's target range of 2-3%, but it's moving towards the right direction, declining more rapidly than expected. The financial strain on Australian households is contributing to the unwinding of inflation, strengthening the case for a decrease in interest rates later in the year.

The housing sector, particularly through rents and new dwelling costs, is a significant contributor to inflation. Yet, these indicators are showing positive trends. The slowing rate of rent increases offers some relief for tenants and hints at a potential shift in the rental market by 2024, as suggested by CoreLogic's data.

The easing cost of living and anticipation of lower interest rates later in the year should improve consumer sentiment, which has been pessimistically low since mid-2022.?

The lower-than-expected inflation rate for the December quarter, combined with the prospect of rate cuts, is likely to positively influence consumer attitudes and, consequently, the housing market activity as the year unfolds.

Are we bullish about the property market in the latter stages of 2024 and into 2025? You bet we are!