Lower inflation paves path for interest rate cut as Jim Chalmers refuses to predict cut or early election call

Underlying inflation was revealed to be at its lowest in three years on Wednesday, offering economic respite to the Government and clearing the path for a pre-election interest rate cut next month.

December quarter inflation figures released by the Australian Bureau of Statistics (ABS) showed annual headline inflation had slowed to 2.4 per cent, while underlying inflation — the Reserve Bank of Australia’s preferred measure — had retreated more than expected, to 3.2 per cent.

Treasurer Jim Chalmers welcomed “incredibly encouraging signs” that inflation was migrating more quickly than anticipated, adding “the worst of the inflation challenge is now well and truly behind us.”

Australians could be “really proud” of the dip in inflation, higher wages and low employment, he said.

“The soft landing that we have been planning for and preparing for is now looking more and more likely,” Dr Chalmers said.

“We don’t pretend that its mission accomplished on inflation, but we are making very substantial progress now on every measure.”

The Treasurer did not stray into speculation about whether falling inflation would trigger a rate cut when the RBA meets on February 18, at pains to avoid “free advice” that could sway the institution’s independent decision.

He refused to weigh in on whether a cut would spur the Government to call a Federal election earlier than a May 17 deadline — a decision he said would be made by Prime Minister Anthony Albanese.

The Government continued to work towards its fourth budget on March 25, and to focus on keeping inflation down, getting wages up and rolling out cost-of-living relief, he said.

But in an election that will be largely decided on who voters trust most to handle the economy, an interest rate cut, or lack of one, is expected to be one of several determining factors.

Australians would have been thousands of dollars worse off under a Coalition Government, Dr Chalmers said in a swipe at Opposition Leader Peter Dutton.

Shadow treasurer Angus Taylor spearheaded the opposition’s comeback, accusing Labor of overseeing the “biggest collapse in Australia’s standard of living in our history” and 12 interest rate increases.

“We’ve got an economy that has been in a household recession for a record seven consecutive quarters,” he said. “We are absolutely at the back of the pack, beating inflation and getting that low inflation, strong economy that we all want to see.”

The Coalition has seized on a new report by Deloitte Access Economics that forecast living standards will not recover to pre-pandemic levels until 2030 despite record Federal and State Government spending.

“If people out there are feeling poorer, it’s not all in your heads. You’re poorer than you were three years ago,” said shadow finance minister Jane Hume, blaming Labor’s “poor decisions” and “broken promises.”

Economists believe the improved inflation figures increase the likelihood of a rate cut but caution it’s not guaranteed.

The influence of temporary Government support measures like electricity bill rebates, complicated interpretation of the headline inflation rate, said EY Chief Economist Cherelle Murphy.

The RBA would also assess risks from the tight labour market, and international economic pressure, including geopolitical tensions and the threat of US tariffs, she said.

“Today’s data suggests the beginning of a rate-cutting phase is closer, although a February rate cut is not a done deal.”

Greg Jericho, chief economist at the Australia Institute said that with headline inflation now firmly in the RBA’s 2-3 per cent target band and underlying inflation coming down at a nice pace, there was “no excuse” not to cut rates.

If it did, the Government would likely try to use the decision to its benefit rather than immediately call an election, he predicted.

“If it goes to election straight after a rate cut, it looks like it’s trying to take advantage of something rather than caring more about what is in the best interests of Australians.”