On 26 February 2025, Australia is set to release the monthly Consumer Price Index (CPI) data for January. Inflation is expected to rise from December, although it has generally shown a decline over the last six months, falling within the Reserve Bank of Australia’s (RBA) target range of 2-3%.
Factors such as government rebates have contributed to this downward trend, allowing the RBA to reduce the cash rate to 4.10% this month, marking its first cut since November 2020. Despite this easing, underlying inflation measures, like the Trimmed Mean Inflation, remain above the target, recorded at 3.2% in December 2024.
The monthly CPI, introduced in October 2022, offers more frequent insights into inflation trends but has limitations. It covers 62-70% of items in the quarterly CPI, excludes some categories, and is subject to revisions, which can lead to short-term volatility.
The upcoming release of January’s Consumer Price Index figures will provide fresh insight into how inflationary pressures are shaping up after months of gradual easing. While the overall direction has been downward, expectations of a slight uptick from December suggest that price pressures have not entirely disappeared. This could lead to short-term fluctuations in market sentiment, particularly as traders assess whether the Reserve Bank’s recent rate cut was well-timed or premature.
Government intervention, particularly through rebates, has played a part in lowering inflation, but these measures are temporary. With key underlying indicators, such as Trimmed Mean Inflation, still above the Reserve Bank’s preferred range, any indication that inflation is proving stickier than expected will prompt questions about the central bank’s ability to continue rate cuts in the coming months. The key focus will be on whether the latest figures reinforce the broader downward trajectory or raise doubts about how quickly inflation can return to the lower half of the target range.
There’s also the matter of how traders interpret the data’s reliability. Since the monthly CPI excludes some categories and covers fewer items than the quarterly measure, individual releases can sometimes mislead short-term positioning. Particularly with revisions possible, reacting aggressively to a single month’s data carries risks. However, ignoring a potential shift in inflationary pressures altogether could mean missing a turning point in market expectations for interest rates.
With interest rate decisions closely tied to inflation performance, the response in rates markets will indicate how confident traders are in further monetary easing. If the data points to a faster slowdown in prices, expectations for additional rate cuts will likely strengthen. If inflation remains stubborn, market pricing for future easing could weaken, forcing reassessments of short-term strategies.
Longer-term trends still favour disinflation, but interruptions in this downward momentum can influence short-term positioning. Each inflation print will be carefully weighed against broader policy expectations, particularly in the lead-up to the next central bank meeting. The degree to which markets react will depend not just on the headline number but also on whether underlying measures indicate persistent price pressures that could complicate future monetary policy decisions.
