Is 2024 the year of deflation and cost of living relief?

The RBA held the cash rate this month, but what's in store for 2024?

The Reserve Bank of Australia (RBA) has held the cash rate steady at 4.35% this week, aligning with economists' predictions from the Finder RBA Cash Rate survey. This reflects a careful approach from the central bank towards inflation control and economic stability amid ongoing cost of living pressures.

Inflation is showing a consistent downward trend, yet Australians continue to grapple with financial stress. With wage increases trailing inflation, there's a notable dip in real purchasing power. To address this, the federal government's revision of the stage 3 tax cuts aims to more equitably allocate tax savings to low and middle income earners, and has been positively received.

Driven by the cost of living crisis, credit card usage has surged over the past year – setting new spending records. However, this has not yet led to record levels of interest-accruing balances. Finder's survey reveals that a majority of experts who weighed in on the topic (57%, 8 out of 14) anticipate a rise in credit card interest balances in 2024, attributed to borrowers adjusting from fixed rates and dwindling savings.

To counter these challenges, the Albanese government is formulating a new cost of living package, expanding beyond prior energy bill subsidies. This plan seeks to provide public aid without fuelling inflation further. Additionally the government has introduced initiatives to alleviate the financial load on Australian families, including enhancements to the Pharmaceutical Benefits Scheme (PBS) and targeted support for single parents and income support recipients.

Despite these initiatives, inflation remains above target and living cost challenges remain persistent. Reflecting on the latest numbers, Anthony Waldron from Mortgage Choice noted, "The latest inflation data released by the Australian Bureau of Statistics showed that the CPI rose to 4.1% in the 12 months to December. This is the smallest quarterly rise since the March 2021 quarter and should give the RBA reason to keep the cash rate on hold.”

Looking ahead, the RBA and government must find a balance between immediate relief and long-term economic stability. The relationship between monetary and fiscal policies will be key to Australia's economic recovery.

Harry Murphy Cruise from Moody's Analytics emphasised the delicacy of rate adjustments, noting, "Australia's fight against inflation is coming along in leaps and bounds, giving the RBA some breathing room before they cut rates later in the year. But progress will slow through 2024, as looming tax cuts will hand cash back to households at the exact same time the RBA is trying to take money out of the economy. That will delay Australia's first rate cut until September."

James Morley of the University of Sydney has slightly later expectations for a cut, saying “Any rate cut will likely wait until other central banks such as the Fed begin lowering cycles and inflation shows further progress back to the target range. This is unlikely to be until the fourth quarter at the earliest.”

As 2024 unfolds, Australia stands at a crucial point, with policy decisions significantly impacting its economic trajectory. The RBA's decision to maintain the cash rate marks the start of what may be a long series of hold decisions. Should prevailing trends persist, this sequence should end in late 2024 with an initial rate reduction. Australian households are likely to welcome such a move, and call for many more.

Finder's Insights Blog examines issues affecting the Australian consumer. It appears regularly on finder.com.au.