Is there more rate pain to come? The next two months will be crucial

The statement reads not only as an account of why the board kept rates on hold this month - as expected after increasing them in November - but also as an account of why it might not need to lift rates again.

Much will depend on "data and the evolving assessment of risks". The board will make that assessment at its first meeting for the year in February.

Here's why that meeting matters so much.

The monthly measure of annual inflation has been falling since it peaked in December. Last week we learned that in October it fell from 5.6 per cent to 4.9 per cent, meaning it's now closer to the Reserve Bank's target of 2-3 per cent than to the December peak of 8.4 per cent.

A few special government measures helped push it down.

An increase in Commonwealth rent assistance decreased recorded rents; energy bill rebates decreased recorded electricity prices; and changes to the childcare subsidy decreased recorded childcare prices.

Those government measures won't depress future inflation readings, suggesting that from here on inflation might bounce back.

But on the other hand, from here on the very large inflation outcomes recorded at the the end of last year will drop out of the 12-monthly figures.

Simple maths suggests that if this year's November and December readings are like the average of the other readings this year, annual inflation will fall to 3.1 per cent.

The November figure will be released on January 10 and the December figure on January 31. Both will be available to the Reserve Bank board when it meets on February 5 and 6, along with the latest quarterly measure of inflation.

If that quarterly measure is the same as the average of the past two quarters, it will show annual inflation of 4 per cent.

Such outcomes - which are likely if inflation continues along its present trajectory - would see inflation closing in on the Reserve Bank's target band and relieve it of any need to further lift rates.

Of course, it mightn't happen. But there's a lot driving down inflation.

The prices we pay attention to are those we see in the supermarket, what we fork out on mortgage payments and household bills, and what we pay at the petrol pump. (Petrol prices have been falling for weeks now.)

Prices we notice less are far less troubling than they were.

During 2022 the price of household appliances climbed 8.2 per cent. So far this year it has fallen 2 per cent.

The price of furnishings climbed 5.3 per cent during 2022. So far this year it has fallen 1.6 per cent. The price of clothing climbed 5.4 per cent. So far this year it has fallen 2.6 per cent.

All sorts of prices are coming down, partly because the supply bottlenecks that pushed them up last year are being reversed and partly because - thanks to 13 near-consecutive interest rate rises - we are not buying at anything like the rate we used to.

Retail spending grew by just 1.2 per cent over the year to October - the least since the COVID lockdowns.

Likely population growth of 2.4 per cent and what Westpac believes to be retail price growth of 3.6 per cent means the amount bought per person actually fell 4.5 per cent.

Even this year's more hyped Black Friday spending was up only 0.6 per cent to 1 per cent compared to Black Friday in November last year. Given our population growth was higher than that, it suggests we spent less on those sales per person this year.

What about the prices that are climbing strongly?

With the exception of rents - up 7.6 per cent over the year - it's hard to find many.

In a speech after the last Reserve Bank board meeting, Governor Bullock said inflation was increasingly being driven by the price of services, which stands to reason given that inflation in the price of goods has been ebbing away.

She nominated increases in the prices charged by hairdressers and dentists, as well as restaurants. And there's definitely something to see there, for dentists.

During 2022 the statistician's measure of the price of dentistry climbed 3.9 per cent.

In the first three quarters of this year, it climbed by that much again, meaning the pace picked up. But the increase is not that much more than the overall increase in wages, suggesting dentistry is not being priced much further out of reach.

Haircuts climbed in price a hefty 6 per cent during 2022 and continued to climb at that pace during the first three quarters of 2023, which is uncomfortable, but at least not accelerating.

The price of restaurant meals climbed 6.7 per cent during 2022 but only 3.8 per cent in the first three quarters of 2023, meaning the pace is easing.

The governor is concerned high wage growth will become embedded in the price of services. But at 3.9 per cent, wage growth isn't particularly high.

About a third of workers are covered by enterprise agreements. Jeff Borland of the University of Melbourne points out the increases in most of the newly-lodged enterprise agreements are flat or trending down. Many of us got a top-up at the start of our three-year agreements which won't be continued.

His statistical analysis suggests that individual agreements aren't pushing up wage growth either, but increases granted by the Fair Work Commission to the 20 per cent of workers on awards are. Yet, by design, these increases reflect rather than drive inflation.

If inflation does accelerate over the holiday season, the Reserve Bank probably will push up rates further. But as the governor seemed to acknowledge on Tuesday, it's not looking likely.