Inflation Cools in Australia: Opportunities Amid a Modest Q1 CPI Rise

The Australian economy continues to navigate a gradual slowdown in inflation, with the latest data showing the Consumer Price Index (CPI) rose 0.9% in the first quarter of 2025. While headline inflation remains elevated at 3.6% annually, the core trimmed mean metric—a key gauge of underlying price trends—has cooled to 4.0%, down from 4.2% in the previous quarter. This moderation reflects a mix of global supply chain improvements, targeted policy measures, and persistent domestic demand pressures. For investors, the data underscores both risks and opportunities across sectors, particularly in housing, utilities, and interest-rate-sensitive assets.

Goods Deflation Drives Broad-Based Cooling

The decline in goods inflation to 3.1% year-on-year marks the sixth consecutive quarterly easing since the 2022 peak of 9.6%. Imported goods, which are highly sensitive to global price trends, have seen particularly sharp declines. Tradable items like footwear, furniture, and appliances now experience deflation, with their prices falling 0.9% annually. This trend aligns with weakening global commodity prices and reduced supply chain bottlenecks.

Investors in consumer discretionary sectors, such as retail or automotive, may benefit from stabilized input costs. However, deflationary pressures in this segment could also signal softening demand, warranting caution in overexposure to goods-heavy equities.

Services Remain Sticky, Led by Housing Costs

While services inflation slowed to 4.3%, housing-related costs continue to defy broader cooling trends. Rental prices surged 7.8% annually—the highest since 2009—driven by a chronic shortage of housing supply and tight vacancy rates. Without government interventions like the Commonwealth Rent Assistance (CRA) program, rents would have risen 9.5%. Regional disparities are stark: Sydney’s rents jumped 8.9%, while Brisbane and Melbourne saw increases of 8.6% and 6.8%, respectively.

This suggests opportunities in real estate investment trusts (REITs) or property developers with exposure to high-demand markets. However, the CRA’s role in moderating price growth also highlights the risks of overreliance on policy support, which may not persist indefinitely.

Energy Rebates: A Lifeline for Utilities

The Energy Bill Relief Fund, introduced in July 2023, has been pivotal in curbing electricity price volatility. Quarterly electricity prices fell 1.7%, contributing to a 2.0% annual increase—down from 6.9% in late 2023. Without rebates, prices would have risen 17% since mid-2023.

Utilities stocks, such as AGL Energy (ASX: AGK) or Origin Energy (ASX: ORG), have stabilized on reduced cost pressures. Investors in green energy projects, including solar and wind infrastructure, may also gain from lower grid-related expenses.

Investment Implications: Positioning for Moderation

The Q1 data reinforces the Reserve Bank of Australia’s (RBA) stance that inflation is on a “broadly expected path” toward its 2–3% target. With the trimmed mean now at 4.0%, further easing of monetary policy seems likely. The RBA’s cash rate, currently at 4.1%, could see reductions in coming quarters, benefiting bonds and rate-sensitive equities.

• Fixed-Income Investors: Australian government bonds (e.g., 10Y AUSTBond) offer yields of ~3.8%, attractive given the downward inflation trajectory.
• Equities: Sectors like utilities and real estate remain resilient, while consumer staples could outperform as goods deflation eases household costs.
• Risks: Persistent service-sector inflation, particularly in housing, poses a tailwind to wage growth and could delay the RBA’s easing cycle.

Conclusion: A Balanced Outlook for Investors

The Q1 CPI data paints a nuanced picture of an economy transitioning from high inflation to a more stable phase. While core inflation continues its downward trend, housing costs and policy-driven interventions highlight sectoral divergences. For investors, the key takeaway is to prioritize defensive sectors with stable cash flows (utilities, real estate) and underweight goods-heavy industries facing deflationary headwinds.

The RBA’s gradual easing path, supported by cooling inflation, offers a tailwind for equities and bonds alike. However, vigilance is warranted: a sudden spike in rents or global commodity prices could disrupt the moderation narrative. For now, the data suggests a cautiously optimistic environment, with opportunities emerging in sectors aligned with the structural shift toward domestic demand stability.