December CPI: Core inflation holds its ground
Headline CPI 0.6%qtr/3.6%yr; Trimmed Mean 0.9%qtr/3.4%yr, Weight Median 0.9%qtr/3.2%yr, December Monthly CPI 1.0%mth/3.8%yr; Monthly Trimmed Mean 0.2%mth/3.3%yr.
Executive Summary:
The Trimmed Mean came in stronger than expected and as our Chief Economist Luci Ellis has noted, it flags a rate hike by the RBA at the February meeting. Looking ahead the monthly data was bit of a mixed bag. Seasonally adjusted headline inflation was in line with our year-ended view. Housing-related inflation was more benign than expected with both rent inflation and home-building inflation below our year-ended forecasts. Rent inflation continues to moderate, and the run of monthly data on home-building costs looks like inflation in that category might have peaked.
Quarterly details:
The headline CPI lifted 0.6% in the December quarter, just a touch above Westpac’s expectation of 0.5%qtr and on par with the market expectations. The annual pace of headline inflation was 3.6%yr up from 3.2% in September and the recent low of 2.1%yr in June.
As has been well documented, the cost-of-living assistance, in particular the energy rebates, have increased the volatility of the headline measure of inflation. They have, however, had a minimal impact on core inflation and so these measures take on a more critical role in assessing the current pace of inflation.
For the December quarter, the Trimmed Mean gained 0.9%, on par with the market and stronger than Westpac’s estimate of 0.7%. We did note that given our estimate was 0.74% at two decimal places we acknowledge some upside risk to our estimate, but the final print was meaningfully stronger than what we had expected and we believe this will tip the RBA over to lifting the cash rate at the February meeting.
It is important to note that the ABS will continue to publish a quarterly Trimmed Mean through to at least the June quarter 2027 and will be compiled in a manner consistent with their historical compilation. For just under half of the Monthly CPI basket there is not enough data to apply the usual seasonal adjustment process so these series will be compiled in a manner consistent with their history of price collection frequency, so that their pre-October 2025 seasonal patterns and properties can be maintained. As such, these series are not consistent with the same series in the Monthly CPI. For more inflation see the ABS “Quarterly Trimmed mean (pre-October 2025 compilation basis) explanatory note”
Variations to our December quarter estimate:
On the downside of our expectations were:
- Electricity –8.4% vs. –4.7%
- Clothing & footwear –0.1% vs. 0.3%
- Auto fuel 1.1% vs. 1.5%
Offsetting to the high side of our expectations were:
- Holiday travel 4.6% vs. 2.8% with a 7.1% increase in domestic travel and a 2.0% increase in international travel.
- Auto prices –0.1% vs. –0.9%.
- Fruit & vegetables –2.8% vs. –3.2%.
- Health –0.5% vs. –0.6% with a smaller than expected fall in pharmaceuticals of –1.3%
Core inflation:
Core inflation, as measured by the Trimmed Mean, gained 0.9%qtr/3.4%yr which was stronger than Westpac estimate of 0.7%qtr/3.1%yr. Remember the following estimates are from seasonally adjusted data. The Trimmed Mean estimate is bounded by –0.3% at the bottom (vegetables) and 1.7% at the upper end (domestic holiday travel). Part of the difference from the final print and our preview estimate is the seasonally reanalysis of data which has produced a different set of seasonal factors, which, when combined with the above variations to our estimates has produced a sizable difference in our Trimmed Mean estimate.
As noted above, the published quarterly estimates for various expenditure classes do not match the historical estimate and thus are not used for the estimates of the trimmed mean; rather the ABS reverts back to compiling these series in a manner consistent with their history of price collection frequency. As such, we are using the above analysis with greater than usual care.
Our current published forecast for the March quarter Trimmed Mean is 0.6%qtr but following on from today there is a modest upside risk to this estimate.
Monthly details:
The monthly CPI rose 3.8%yr in December, coming in a touch stronger than Westpac’s 3.7%yr estimate and the market consensus of 3.6%yr. The monthly pulse was 1.0%mth, against our expectations for a 0.9%mth lift. As highlighted in our preview, December is typically a seasonally strong month, with the seasonally adjusted measure printing at 0.2%mth versus our forecast of a 0.1%mth rise.
The December monthly trimmed mean increased by 0.2%mth taking the annual rate to 3.3%yr from 3.2%yr in November. Our expectation was for a 0.1%mth and 3.2%yr pace. The three-month pace has slowed from 1.0% in September to 0.8% in December, though the annualised pace remains above the top of the RBA’s target band.
As indicated above, the monthly and quarterly trimmed mean are constructed differently. The monthly measure draws on the full set of monthly price observations and trims the seasonally adjusted monthly movements. For expenditure classes that show seasonality but lack sufficient history for the ABS to apply its standard seasonal adjustment process, the ABS either smooths the series, or backcasts it to extend the history to enable standard processes to be applied. It will take at least 18 months of data before the monthly trimmed mean can support a more detailed assessment of core inflation.
Promising details in the monthly show new dwelling costs moderated to its softest pace in seven months, rising just 0.2% in the month compared to 0.5% and 0.4% in the two-months prior. This suggests that the annual pace, which lifted to 3.0%yr from 2.8%yr, may have peaked. Rents also moderated to 0.2% after a 0.4% jump in November. Here the annual pace moderated to 3.9%yr from 4.0%yr previously.
In our preview note, we highlighted several expenditure classes where current inflation momentum has been concentrated. A third of these showed signs of moderation in December, including motor vehicle repairs and beef & veal. Among the remaining 12 categories that appear more persistent, eight are policy‑driven, leaving accessories; audio, visual & computing media & services; lamb & goat and coffee, tea & cocoa. For accessories, the persistence likely reflects higher silver and gold prices. The latter three categories will be important to watch closely in coming months.
Some other areas we will be watching closely include hairdressing & personal grooming services, where monthly inflation momentum has picked up over the past three months (0.3%, 0.4%, 0.5%), taking the through the year pace to 3.2%yr. A similar pattern is emerging in breakfast cereals and other food products, where monthly price gains firmed through the quarter.
While our published nearcasts were broadly in line with the monthly results, there were some more discernible differences.
On the downside:
- Electricity prices 0.0% vs. 12%
- Clothing & footwear fell for a second consecutive month, –0.8% vs. 0.6%
- Auto fuel –0.5% vs. 0.4%
- Rents 0.2% vs. 0.4%
- New dwelling costs 0.2% vs. 0.4%
- Communication –0.4% vs. –0.1%
Offsetting these, on the upside:
- Recreation & culture 7.4% vs. 5.1%, owing to a jump in holiday travel 15.9% vs. 11%
- Food 0.4% vs. 0.2%, largely due to a smaller-than-expected fall in fruit & vegetable –0.2% vs. –1.4%
- Household contents & contents –0.2% vs. –0.6%
- Health –0.4% vs. –0.9%
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