Australia's December quarter inflation report is due today (1130 AEDT). Although the ABS transitioned to monthly inflation reports late last year, it continues to produce its long-established quarterly series. The RBA has made clear that the quarterly data will remain its main focus in assessing inflation and guiding monetary policy decisions. Renewed inflationary pressures lifted headline CPI through the top of the RBA's target band (2-3%) in the September quarter, while core inflation touched 3%. Meanwhile, strong labour market data last week showed the unemployment rate fell back to 4.1% in December. Those factors have market pricing close to evenly split between a hike and a hold from the RBA at its February meeting, with today's report shaping as the key variable upon which the decision could swing.
December quarter preview: Quarterly inflation expected to slow
Inflation is forecast to ease back in the December quarter, with a range of outsized price increases from the September quarter not expected to repeat. Quarterly headline CPI is expected to slow to 0.6% (forecast range: 0.2-0.8%) - down from 1.3% in the September quarter - but with the annual pace rising from 3.2% to 3.5% on base effects. On a core or trimmed mean basis, a 0.8% quarterly rate is expected (range: 0.7-1%), lifting the annual pace from 3% to 3.2%. Based on the most recent inflation readings for November, headline CPI was running at 3.5%yr and the trimmed mean was 3.2%yr.
The market forecasts broadly align with the outlook the RBA published in its most recent Statement on Monetary Policy last November. The RBA's forecasts are for headline CPI of 0.5%q/q and 3.3%Y/Y, with the trimmed mean at 0.8%q/q and 3.2%Y/Y - though it has been wary of upside surprises to this outlook as the monthly reports for October and November have come in. That has seen the RBA become more hawkish in its communication, effectively signalling the easing cycle has concluded.
September quarter recap: Inflation back to top of RBA target band
Annual inflation reaccelerated back to the top of the RBA's target band in the September quarter, rising from 4-year lows in the June quarter. Headline CPI rose by 1.3% in the quarter (up from 0.7% in the previous quarter), surging from 2.1% to 3.2% over the year. Trimmed mean inflation increased by 1% in the September quarter (0.7% prior), firming to a 3% annual pace from 2.7% previously.
Higher quarterly inflation was driven by a range of factors. A notable rise in services inflation (1.3%) was key, with rents again up solidly (1%) and property rates and charges seeing their largest quarterly jump (6.3%) in 11 years. Travel costs - both domestic (3.2%) and international (2.7%) - were also influential. Meanwhile, other key inflation drivers were electricity prices (9%) following annual price reviews and government rebates ending and new dwelling costs (1.1%).
