Australian headline inflation matched expectations in the September quarter, moderating from a 13-year high to 3.0%Y/Y. The underlying measures came in above consensus, lifting above 2% for the first time since 2015. While that may prompt an upward revision to the RBA's forecasts it will take more than that to shift its 2024 guidance on rate hikes.
Consumer Price Index — Q3 | By the numbers
- Headline CPI came in on consensus at 0.8% in Q3, in line with Q2's outcome, while the seasonally adjusted CPI also printed at 0.8%. Base effects slowed annual CPI from 3.8% to 3.0% (vs 3.1% expected) on the headline rate and from 3.7% to 3.0% on the seasonally adjusted measure.
- The underlying measures (which are seasonally adjusted) printed to the upside of expectations, clearing 2% for the first time since 2015;
- Trimmed mean was 0.7%q/q (vs 0.5%), lifting the annual rate to 2.1% (vs 1.8%) from 1.6%.
- Weighted median increased 0.7%q/q (vs 0.5%) as the 12-month pace firmed from 1.6% to 2.1% (vs 1.9%).
Consumer Price Index — Q3 | The details
Australian inflation in the September quarter continued to be buffeted by pandemic-related volatility. The effects of earlier government measures to support households through various subsidies and rebates are fading and boosting inflation, but the lockdowns in place through the quarter created new crosscurrents with many items unavailable, making it difficult to establish a clean read on conditions. Markets will be buoyed by the stronger-than-expected outcomes on the underlying measures, which have moved above the RBA's 2% lower target for the first time since 2015, as a sign that inflationary pressures are broadening.
The main drivers of inflation in Q3 came from new dwelling purchase costs as the dampening effect from the federal government's HomeBuilder grants diminished and from fuel as rising demand amid global shortages sent prices higher. These two items contributed 0.63ppt to the quarterly CPI figure. The effects of the global supply chain bottlenecks on prices for consumer durables are visible, though the impact is significantly lower than seen in many other countries.
Inflation in the housing group posted a 1.7% rise for the quarter, its fastest rise in 4 years. This was driven by a 3.3% surge in new dwelling prices as demand, boosted by stimulus measures, has run up against materials shortages and supply disruptions. Construction-related grants have held down the measured purchase price of new dwellings over the past two quarters, but with these schemes either closing or winding down fewer government subsidies were distributed, leading to the acceleration. Rents were only modestly higher in Q3 (0.2%), weighed by further declines in Sydney (-0.5%) and Melbourne (-0.3%) amid the locdowns, though declining vacancy rates were pushing up rents across the other capitals.
The transport group CPI lifted by a strong 3.2% in the quarter as rising global oil prices pushed up the cost of filling up further. Automotive fuel prices rose by another 7.1% in Q3 following the increases of 8.7% and 6.5% in the previous two quarters. Fuel prices are up 24.6% over the year, accounting for almost one-third of the rise in annual inflation.
With consumer demand robust, the signs of the supply-chain bottlenecks and semi-conductor shortages were evident through the rise in prices for consumer durables. This included rises in Q3 for furniture and furnishings (3.4%), new vehicles (1.4%) and computers and AV equipment (1.8%). The one major exception was a substantial fall in clothing and footwear (-3.8%) as the lockdowns in New South Wales and Victoria led to retailers cutting prices to clear winter inventories. This subtracted 0.14ppt from quarterly inflation.
In other highlights in the report, food & non-alcoholic beverages were held to a 0.3% rise for the quarter by falling fruit & vegetables prices (-3.5%) due to seasonal conditions boosting supply and the lockdowns hitting demand from restaurants.
Consumer Price Index — Q3 | Insights
The outcomes for underlying inflation at a 2.1% annual rate are likely to prompt an upward revision to the RBA's central forecasts next week. The recent October minutes did flag the potential for this to occur. As they currently stand, the Bank's underlying inflation forecasts do not show trimmed mean inflation rising to the lower 2% target until mid 2023. The question is whether that scenario prompts any shift on its 2024 guidance for rate hikes. Given the RBA's shift in reaction function from forecasts to actual outcomes, I do not see that as likely. The speech from Governor Lowe in September makes it clear that the RBA wants to see inflation around the middle of the 2-3% target band and to have wages growth running at around 3% to give it confidence that it can sustainably deliver this aspect of its mandate; outcomes which are yet to occur.