Great news on inflation, with our headline monthly consumer price index (CPI) indicator dropping 0.2% month-on-month in January that works against those doubting Thomases who want to believe that inflation is not beaten and that interest rates won’t fall in May. Worse still, there are those who want to warn that the next move will be up!

Well, the ABS gave these doomsters a statistical kick-in -the-pants, but it’s still early to crow that we optimists on inflation are unequivocally right, but it is looking good.

Here are the important takeaways from the CPI data:

1. The headline monthly CPI rose at an annual pace of 2.5% in January, which was the same as in December.
2. The result was less than market forecasts of a 2.6% rise.
3. Lower housing costs and travel prices were on the slide and were decent helps in lowering the CPI.
4. The trimmed mean gauge did rise to an annual rate of 2.8% in January from December’s 2.7% pace, but it is in the RBA’s target band of 2% to 3%.
5. The annual growth rate for goods costs is now 1.8%.
6. Services prices dipped 0.7% in January and services inflation has been the big problem of late.
7. Rent and building inflation are heading down, which is good news for overall inflation.

This chart shows the good news on the trimmed mean or core inflation reading. Check out the blue line, which now is inside that 2% to 3% band — the shaded area.

To be accurate, the monthly CPI only tracks about 40% of the goods in the quarterly CPI but two months of core inflation inside the 2% to 3% band is a nice development for those hoping for more rate cuts this year.

This was the reaction of the CBA Group economists, who “…expect the RBA to deliver further 25 basis point rate cuts in May, August, and November for an end year cash rate of 3.35%. The near-term risk sits with another rate reduction in April if the labour market data loosens more materially in the next couple of months.

Source AMP, ABS.

Meanwhile, the AMP economics team was also positive on the inflation data drop. This is what the deputy chief economist Diana Mousina reported:

Today’s inflation data shows more positive news on the inflation story in Australia. Based on the monthly components, we have downgraded our March quarter headline inflation forecast to 0.8% (from 0.9%) which is also below the RBA’s forecast of 0.9%. We also slightly downgraded our trimmed mean forecast, which is currently 0.7%, or 2.9% over the year.

The downside surprise in today’s figures keeps the risk of another near-term RBA rate cut alive. We think the most likely time for another rate cut would be in May, after the full quarterly set of inflation data and further monthly jobs data which should show the unemployment rate settling above 4%.

 From my point of view, I like the chart above, which shows services inflation is trending down nicely.