Australian share market hits all-time high after inflation falls to two-year low of 4.1pc — as it happened

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The US Federal Reserve will have its first meeting of the year overnight, and financial markets are hoping it will give them a sharper timeline for when it might start cutting rates.

Markets have already priced in multiple rate cuts this year, but T. Rowe Price's chief US economist, Blerina Uruci, says there could be as many as seven in 2024.

Ahead of the Fed's meeting, she spoke to The Business host Kirsten Aiken about the ongoing resilience of the US economy, and what it might mean for the US central bank and the year ahead.

You can watch the full interview below:

The Australian share market has totally forgotten about its lower start to the day by setting a new record high thanks to the inflation figures from the ABS.

The ASX 200 absolutely soared past its previous record closing high of 7628.9 it set back in August 2021, finishing up at 7,680 at the close — gaining 1.1% today.

It follows the ASX setting a new intra-day trading high of 7,682.3 earlier this afternoon.

Given how the market performed today, it's not surprising to see all 11 sectors ended in positive territory.

Real estate was the best performer, up 2%, followed by utilities (+1.7%), energy (+1.6%), financial (+1.5%) and healthcare (+1.2%).

As for the top five performing companies today:

• Nickel Industries +9.7%
• Star Entertainment +5.7%
• Tabcorp +5.3%
• Champion Iron +4.8%
• HomeCo Daily Needs (REIT) +4.1%

While the five that declined the most:

• Weebit Nano -9.8%
• Incitec Pivot -7.9%
• Sayona Mining -4.8%
• Dominos Pizza -4.2%
• Arcadium Litihum -4%

Kate will be closing the blog soon with all the market close details, so I'm going to take my leave now.

Thanks for some very intelligent and thoughtful questions — what a great audience we're lucky to have!

We'll also be taking a lot of questions, no doubt, next Tuesday when the Reserve Bank meets at 2:30pm AEDT.

Good question, Lee. Emilia Terzon with this answer to it:

As we're hearing this afternoon, many economists say today's inflation figures all but rule out another rate hike by the Reserve Bank.

Some even think the RBA went too far by hiking to 4.35 per cent in November (see the comments by KPMG's Dr Brendan Rynne) we may get cuts as soon as May (according to Capital Economics) or June (according to AMP).

This will all be music to the ears of people considering buying a property or refinancing.

"A reduction in interest rates is likely to boost housing demand," CoreLogic's Eliza Owen notes.

"As seen in the rental market, fundamental demand for housing is very strong, but demand for home purchases has been influenced by high interest costs and limited borrowing capacity."

House prices have already been going up over time despite higher interest rates.

KPMG's Dr Rynne is urging borrowers to be cautious. He believes that, because banks have seen their wholesale borrowing costs increase, rate cuts mightn't flow through substantially to home loan rates.

"The important thing is to recognize that there is a disconnect between the mortgage rates that you and I pay from the bank versus the cash rate," he says.

"It doesn't necessarily mean the mortgages are going to fall in lockstep with any decline in the cash rate."

There's a few issues to unpack here.

First, while inflation is now falling, and quite quickly, it's still high — 4.1% annual inflation is well above the 2-3% the Reserve Bank wants to see.

Also, falling inflation, also known as disinflation, is very different from deflation.

Disinflation is when price rises are slowing, but prices are still rising.

Deflation is where prices are falling.

Unless we have deflation, or a long period of wage increases well in excess of the inflation rate, then most working people have seen their living standards eroded by the inflation that's already happened. The stage 3 tax cuts can be seen as some compensation for that.

The other issue is that the real reasons for the stage 3 tax changes are political and economic.

(If you want a quick recap and explanation of what they are, watch this).

Politically, they wedge the Opposition into either supporting them or being seen as favouring a minority of high income earners over the vast majority of taxpaying Australians.

And they do this just ahead of a key by-election.

Economically, few tax experts fully approved of the original stage 3 tax cuts, with most saying the 37% tax rate bracket should have been retained.

That's what Labor's stage 3 changes do, so most economists who specialise in tax say it's better policy, regardless of the inflation situation.

I wrote about that in this analysis piece.

Great question Chris.

Of course, last year was a shocker for anyone who still had Commonwealth government student debts still outstanding.

HECS/HELP debts rose by 7.1% last year — the biggest increase on record — due to the inflation indexation on them.

To understand how this works, I highly recommend this explainer by Dannielle Maguire, which includes the formula used to calculate the annual indexation.

To calculate this year's number, we'll need the March quarter Consumer Price Index, which we won't get until late April.

In the meantime, I've had a crack, using the assumption that March quarter inflation will be the same as the December quarter, at 0.6%.

That would lead to a HECS/HELP indexation rate of 4.6% — much better than last year and now also much better than the interest rate on a home loan.

This is the link to Dannielle's explainer, which really is worth a read to get your head around it all.

Some more from Deutsche Bank's Phil Odonaghoe, this time from his note on today's Consumer Price Index data release.

"In the space of two months, trimmed mean inflation has dropped by more than a full percentage point.

"Specifically, the monthly trimmed mean indicator has dropped from 5.3%yoy in October to 4.0%yoy in December."

So could the RBA be struggling with inflation below its 2-3% target range by this time next year?

"If that annual deceleration was repeated in 2024, trimmed mean would end up less than 1%yoy," Odonaghoe adds.

"A bridge too far for sure, but it highlights how quickly inflation pressures have eased, especially at the end of last year."

Hi Scott, that is the $64 billion question, isn't it.

I think the November rate rise was something of a line-ball call at the time, this was how RBA Governor Michele Bullock summed up the decision to raise:

"The board judged an increase in interest rates was warranted today to be more assured that inflation would return to target in a reasonable timeframe."

That makes it sound like a bit of an insurance policy.

But it's arguable that the RBA didn't pay enough attention to the risks of taking out this insurance.

A lot of economic data lags and there are all kinds of financial and psychological tipping points where things can quickly go from being fine to decline.

It reminds me of a note from Deutsche Bank economist Phil Odonaghoe about the 65k drop in employment and 100k in full-time jobs the ABS reported for December, which he dismissed as statistical noise:

"Did the Australian economy just 'snap'? Unlikely." was his conclusion.

Unlikely maybe, but not impossible.

On top of those jobs numbers, we've now got a massive drop in inflation over the December quarter, we saw yesterday a  historic fall in retail sales — the largest outside of the pandemic and GST introduction.

Now, it could be that the same changes in behaviour are skewing the seasonally adjusted numbers across different ABS statistics (the seasonally adjusted inflation number was very similar to the headline figure).

Or, it could be that, perhaps in part due to the rate rise in November, something did finally just snap as households scrambled to adjust.

That's a concern expressed by AiGroup CEO Innes Willox:

"The warning arising from today's announcement is that the economy may be slowing too rapidly and we may be looking at a hard rather than a soft landing.

"The November increase in interest rates is yet to fully flow through and further dampening impacts may tip the economy into reverse."

With the lags in the data, we'll probably need to wait a few more months to be sure one way or another.

With today's inflation figures coming in lower than many economists were expecting, some believe the Reserve Bank may have gone too far in its strategy of driving down demand.

That's the take of KPMG's Dr Brendan Rynne, who I just interviewed for tonight's 7PM News.

"The last increase in the cash rate by the Reserve Bank in (November) of last year was unnecessary," he says.

"The cash rate has now been pushed too high."

The cash rate is now at 4.35 per cent.

Dr Rynne believes the RBA will start cutting rates as early as August, and will go for another rate cut by the end of the year.

"Our expectations is that the Australian economy is going to be pretty weak," he says.

"For the first half of this year, it's going to be a tale of two halves. Second half will start to improve. But we've still got a fair amount of pain ahead of us."

I don't think I've seen anyone sum it up better than economist Harry Murphy Cruise from Moody's Analytics.

"Dead, buried, cremated: the prospect of another interest rate hike in Australia is no more.

"The odds of a hike were low leading into the December inflation print, but the latest inflation data confirm the Reserve Bank of Australia's next move will be down."

Combined with the horror jobs numbers from December, the abysmal retail sales data from the same month and consumer sentiment surveys that consistently show households in financial pain, it would take a masochistic central bank to raise rates next week.

And it's hard to see the economic picture changing so dramatically that rate rises could come back onto the agenda thereafter.

However, Murphy Cruise says that doesn't mean borrowers should expect interest rate relief early this year.

"It's often said that the final mile of bringing down inflation is the hardest.

"Making things more difficult, stage 3 tax cuts already in our baseline forecasts will hand back cash to households at the exact same time the RBA will be trying to take money out of the economy.

"We have calculated that the tax cuts equate to a six-month delay in getting inflation back below 3%, a delay that will keep the RBA's finger off the rate cut trigger until September."

He notes that is the original stage 3 tax cuts, not the changes proposed by Labor, which shift the income boost somewhat away from higher earners to lower income households who tend to spend more of what they earn.

"Our modelling suggests the impact on annual inflation —on top of the cuts already in our baseline — is less than 0.1 percentage point in 2024 and 2025.

"This is effectively a rounding error that is insufficient to push interest rates higher."

Now's your time to ask, because my intelligent colleague Michael Janda is standing by to answer them.

If you want to know why today's inflation numbers are a big deal, what the Reserve Bank is likely thinking with interest rates, or just want to know how this all relates to your mortgage, use the blue button at the top of the blog to ask away.

(Heck, you can even ask for his thoughts on the A-League, if that's more your thing...)

The ASX 200 has been nudging it for a little while now, but the local share market has officially set a record intra-day high.

The S&P/ASX200 is currently sitting at 7,639.50 — eclipsing the previous intra-day record of 7,632.9 that was set on August 13, 2021.

Should the local share market close above 7628.9, it will be the highest close ever recorded in the ASX's history.

Earlier today it looked unlikely that the ASX would surpass the record, but that cooler inflation data for December has seen it skyrocket as traders now start to seriously consider rate cuts happening this year.

With inflation coming in lower than expected and likely prompting the RBA to keep rates on hold at its meeting next week, what else does it tell us about the state of the Australian economy?

Jarden's chief economist, Carlos Cacho, said even though inflation is moving in the right direction, there are some elements that suggest the economy is "a little bit unbalanced".

Those pressure points, he said, come from the services side of the economy, and details like housing construction costs are going to still be a focus for the RBA.

You can catch his full assessment of the state of the economy and his take on the inflation data with finance presenter Alicia Barry below:

The outlook for interest rate cuts by the end of the year has been given a major boost with evidence that inflation is rapidly slowing.

Official figures from the ABS show the pace of inflation in the December quarter dipped significantly under the weight of aggressive interest rate rises.

For more, here's the latest report from senior business correspondent Peter Ryan:

Sorry Rob, that's our bad!

The live updates on the major ASX indices is now back where it belongs — at the very top of the blog.

Go forth and peruse as you see fit 🕵️

(PS: you can always find the live data right here on the ABC's dedicated Business page — just scroll down!)

Nickel and lithium miners haven't been having a great time lately — especially since  prices for those commodities have fallen sharply in the past year.

IGO is the latest producer to put its nickel operations on hold.

The company said it would place its Cosmos nickel project in Western Australia into "care and maintenance" given the low prices for the metal.

In addition, IGO has trimmed its annual lithium production forecast.

Australia's nickel producers have been squeezed by Indonesia's emergence as a supply powerhouse which has led to a 40% price slump over the past year.

IGO, which already wrote down the value of Cosmos and its Forrestania mine by nearly $1 billion in the previous financial year, said that it foresaw an additional impairment of $160 million to $190 million.

"This is not the outcome anyone at IGO wanted, however we cannot ignore the operational and financial risks involved in continuing to develop Cosmos in the current environment," IGO CEO Ivan Vella said in a statement.

The company also trimmed production guidance at its Greenbushes lithium project to 1.3 million metric tons to 1.4 million tons for fiscal 2024 (a 7% drop from original guidance).

Due to market volatility, it did not sell any lithium hydroxide during the December quarter, it said.

Analysts expect Australian lithium producers may be set to track the nickel industry in project curtailments and delays this reporting season, given slower-than-expected electric vehicle sales.

This latest inflation data is a very good set of numbers, especially when you recall that inflation peaked at 7.8% in December 2022.

Now, a full year later, it's down to 4.1% — that's 0.2 percentage points shy of Australia's annual inflation rate being effectively cut in half in 12 months.

Carlos Cacho, the chief economist at Jarden, says the data will be music to the ears of the RBA ahead of its meeting next week.

"They [the RBA] were expecting that year-end inflation for December was going to come in at 4.5% for both headline and trimmed mean, which is their preferred measure," he said.

"Instead we got 4.1 and 4.2. That's a material fall versus their expectations, so they'll certainly be pleased to see that."

But the devil is in the detail, he says, and services inflation is one such detail that the RBA will be zeroing in on — and although it is lower again, it is still elevated, Mr Cacho said.

"But if you combine this data with the softer retail sales data, the labour market data we saw earlier this month as well, it certainly makes a strong case for the RBA to remain on hold," he said.

"So the market is going to continue to expect [rate] cuts are coming at some stage this year."

The share market has recovered from its earlier losses, after the ABS revealed inflation has slowed to a two-year low of 4.1%.

The ASX 200 was up 0.3% to 7,621 points by 11:50am AEDT.

"This [inflation] data on its own would suggest the RBA is done hiking," said Carlos Cacho, Jarden's chief economist in Australia.

As it looks increasingly likely that the cash rate has peaked at 4.35% (a 12-year high), the ASX climbed higher towards a record high.

However, the idea that rates could fall later this year makes it less attractive to hold cash.

The Australian dollar slipped 0.3% to 65.8 US cents.