Mixed signals from underlying inflation

The January CPI data provided mixed signals about developments in underlying inflation. The CPI excluding food and energy and the CPI excluding the eight most volatile components each rose by just 0.1% m/m, which were the lowest gains since early 2021. Those improvements were not matched by the CPI-trim and CPI-median core measures, however, with the newly published indices for each showing gains of 0.3% m/m for the second month running. That difference is because CPI-trim and CPI-median filter out the largest price moves among the individual CPI components, so did not incorporate the sharp declines of almost 3% m/m in childcare and communications prices, nor some of the falls in goods prices: including for home entertainment equipment, clothing and motor vehicles. While the 3-month annualised rates of CPI-trim and CPI-median remained too high for comfort at close to 3.5% in January, the Bank should still take some encouragement from the downward trends across the core measures. They reduce the chance that the Bank will be forced to resume interest rate hikes again, even as markets price in a higher terminal policy rate of 4.75%, implying that there is one final 25 bp hike to come.