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Consumer prices rose 3.4 per cent over the year to January, steady at the same annual rate of inflation as in December.
That is the equal lowest pace of annual inflation recorded in the monthly Consumer Price Index (CPI) indicator from the Australian Bureau of Statistics (ABS) since November 2021.
Economists had generally been expecting inflation to re-accelerate slightly in January to 3.6 per cent.
"Today's CPI release should be broadly reassuring to the RBA and, on balance, reduces the risk it might consider yet another rate increase in coming months," wrote Betashares chief economist David Bassanese.
Food, housing and insurance drive inflation
The bureau's head of price statistics Michelle Marquardt said the biggest contributors to inflation over the year to January were housing (+4.6 per cent), food and non-alcoholic beverages (+4.4 per cent), alcohol and tobacco (+6.7 per cent) and insurance and financial services (+8.2 per cent).
"Annual inflation for food and non-alcoholic beverages increased to 4.4 per cent in January, up from 4.0 per cent in December," she observed.
"Annual inflation remains elevated for food, apart from fresh food categories.
"Meat and seafood and fruit and vegetables, for example, saw lower or negative annual inflation."
Within housing, annual rent increases stabilised in January at 7.4 per cent, while new home purchase costs resumed their disinflation, with the 4.8 per cent rise over the year to January down from 5.1 per cent in December.
The key price falls were for recreation and culture (-1.7 per cent) and holiday travel and accommodation (-7.1 per cent).
CBA economist Stephen Wu noted that, relative to the last time they were measured in October, prices also fell for furniture (‑5.6 per cent), small electronic appliances (‑4.5 per cent), children’s garments (‑3.8 per cent) and footwear (‑0.3 to ‑4.5 per cent).
"Discretionary inflation is coming down rapidly as non-essential spending falls in response to real household disposable incomes squeezed by high inflation, a rising tax take and dwelling interest payable," he noted.
"However, non discretionary inflation remains high, particularly because of the housing related components of the CPI basket."
Ms Marquardt said, excluding some of those more volatile price moves, inflation rose 4.1 per cent in January, down from 4.2 per cent in December, down from a peak of 7.2 per cent just over a year ago.
The Reserve Bank's preferred trimmed mean measure of inflation fell below 4 per cent (3.8) for the first time since March 2022.
"In seasonally adjusted terms, the CPI excluding volatile items and holiday travel rose by 0.2 per cent — the fifth consecutive 0.2 per cent increase, which is equivalent to annualised inflation of only 2.4 per cent," argued Mr Bassanese.
"On that basis alone, inflation has already fallen to the bottom of the RBA's 2 to 3 per cent inflation band."
When will the RBA start cutting interest rates?
Mr Bassanese believes the RBA "will have capacity to cut interest rates at least twice in the final months of 2024" as services sector inflation cools back towards pre-COVID levels later this year.
AMP's deputy chief economist Diana Mousina believes the bank may be able to start cutting even earlier, despite the economy being quite resilient so far.
"The economy has actually weathered these interest rate hikes a lot better than where most people were expecting it to," she told ABC's The Business.
"I think that this year will actually feel a bit more difficult for households.
"Even though we've had these concerns about cost-of-living issues, in the past two years consumers have mostly been able to offset those concerns by being able to be employed and drawing down their savings.
"But, in 2024, that savings pipeline looks a lot weaker, especially for the groups that are most vulnerable to higher interest rates and elevated inflation."
She believes that continued weakness in household consumption and economic growth (as measured by GDP) will translate to further rises in unemployment, which has already risen from a low of 3.4 per cent to 4.1 per cent.
"By the time we get to the middle of the year, we'll see the unemployment rate at about 4.5 per cent," she forecast.
"And we see about three rate cuts in this current year."
KPMG's chief economist Brendan Rynne is another who thinks the RBA might be forced to cut rates "sooner and faster" than many, including its own analysts and board members, currently expect.
"The national accounts out next Wednesday will reveal the December 2023 quarter GDP figures — and it will be a close-run thing as to whether they show the economy is going backwards with negative growth," he wrote.
"There is a risk that Australia could not only be in a per capita recession (given four out of the previous five quarters showed real GDP per capita declining) but could also tip into a technical recession."
Although, in a separate note out on Tuesday, Dr Rynne pointed out that the extra day in February 2024 due to it being a leap year would add about $6.6 billion of economic activity, making it difficult for the economy to shrink in the March quarter.