Inflation has taken a notable downturn in the December quarter, according to the latest figures from the ABS, presenting a positive outlook for small business owners and households for the year ahead.

The Consumer Price Index (CPI) for the final quarter of 2023 revealed a decrease to 4.1 per cent, marking a two-year low compared to the same period in 2022. This unexpected dip in inflation has ignited optimism among economic analysts, suggesting that further interest rate hikes are becoming less likely.

The ABS reported that economists had anticipated a higher CPI of 4.3 per cent, making the actual figure of 4.1 per cent a positive surprise. Moreover, the quarterly rate of CPI rose by only 0.6 per cent, a stark contrast to the 0.8 per cent predicted by experts.

One of the key contributors to the subdued inflation figures is the slower pace of increase in food and fuel prices.

Food and non-alcoholic beverages, for instance, rose by 0.5 per cent in the quarter, with notable declines in lamb prices by 12.1 per cent and beef and veal by 1.5 per cent, attributed to farmers’ destocking.  Fuel prices also experienced a decrease of 0.2 per cent for the quarter.

Are rate cuts on the horizon?

Importantly for small business owners, the Reserve Bank’s move toward a potential interest rate cut gains momentum with this inflation report. The lower-than-expected CPI results should quash any lingering possibilities of an RBA rate hike in February, which should come as a relief to households, entrepreneurs and small businesses.

CreditorWatch chief economist Anneke Thomson said the CPI figures will come as a great relief to both home and business borrowers.

“It all but assures them that the Reserve Bank of Australia will keep rates on hold at next Tuesday’s Board meeting. Overall inflation fell sharply from 5.4 per cent to 4.1 per cent, indicating that the monetary policy measures the RBA has taken to date are now working well to bring down inflation,” Thompson said.

Treasurer Jim Chalmers, emphasised the positive implications for businesses.

“What we’re seeing here is inflation slowing, real wages growing, and from the first of July, we will see tax cuts flowing,” he remarked. Chalmers added, “This is not mission accomplished, but it’s really welcomed, and it’s really encouraging progress.”

The CPI data also indicated a reduction in housing costs and rents, which could be particularly encouraging for small business owners who often operate from rented premises.With housing costs up by 1 per cent, and rents rising at a slower pace of 0.9 per cent for the quarter, entrepreneurs may find some relief in operational expenses.

Global economic conditions mean disruption still possible

While the ABS data shows a positive trend, economists caution that external factors, such as the global economic landscape and potential disruptions, could impact inflation in the future.

“While falling inflation is very positive news for the RBA and borrowers overall, operating conditions for businesses over the next six months will remain very challenging,” Thompson said

However, as of now, the Australian market seems to be responding favourably to the news, with the share market edging up by approximately 0.25 per cent.

For small business owners, this dip in inflation and the potential for a stable interest rate environment suggests a conducive economic climate.

“The lag effect of monetary policy impacts is now being felt, and business confidence and conditions are slowing sharply as we move further in to 2024. It is unlikely confidence will return to consumers until there is any real sign of upcoming interest rate cuts, which are still unlikely to occur before the third quarter of this year. An unemployment rate rising more sharply than forecast could convince the RBA to bring cash rate cuts forward into the second quarter of 2024, and slowing business conditions means there is an ever-increasing possibility this could happen,” Thompson concluded.

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