The outlook for the next two months is that we should see further, and perhaps rapid, declines in inflation. In fact, only thanks to rounding up from two decimal places did inflation in October register 4.9%, and not 4.8%, so we are already on the path to a new reduction just due to rounding.
Last year’s weather-induced food and energy price increases, plus the huge post-Covid reopening increases in holiday-related costs around December, will hopefully not be repeated, at least least not as substantially as last year. That said, we are still in an El Niño weather pattern, so extremely cold or wet weather and subsequent price impacts cannot be ruled out, although they will hopefully be less disruptive and damaging than in 2022.
If so, then we could well see some further substantial reductions in headline inflation taking us into the new year of 2024 and creating a much more benign inflation environment in early 2024 than we had in early 2023. If so, That could well temper any lingering thoughts about further RBA hikes.
We still think the RBA’s policy rate has peaked, but the main risk will come later in 2024, in February and March, when base effects (from January and February inflation) become much less favourable. Therefore, unless we see the Australian month-on-month inflation rate fall more convincingly by then, there is still, in our view, a slight risk of a final 25 basis point hike by then. If we pass that point, it will become increasingly likely that the peak occurred with the last rise in November.