Upside surprises in today's Australian Q3 CPI report lifted inflation further above the RBA's target band to 7.3%Y/Y on a headline basis and 6.1%Y/Y on the core rate, both running at 30-year highs. Pressure on household energy bills is now adding to the inflationary impulse that remains driven by new dwelling and grocery prices as well as reopening factors from the lifting of pandemic restrictions. Following its downshift at the October Board meeting, I expect the RBA to continue with rate hikes in 25bps increments.
Consumer Price Index — Q3 | By the numbers 
- Headline CPI was 1.8% in the September quarter — stronger than the 1.6% rise expected but in line with Q2's outcome — as the annual pace elevated from 6.1% to 7.3% (vs 7.0% expected). Seasonally adjusted CPI also came in at 1.8%q/q and 7.3%Y/Y.
- The average of the three underlying CPI measures firmed from 1.5% to 1.8% in the quarter to be running at 5.9%Y/Y.
- Trimmed mean was 1.8% — higher than the 1.5% rise expected and up from 1.6% in Q2 — as the annual rate lifted sharply from 4.9% to 6.1% (vs 5.5% expected).
- Weighted median was 1.4%q/q, in line with the pace in Q2, though the annual rate advanced from 4.3% to 5.0%.
- CPI excluding 'volatile items' firmed to 2.1% in Q3 (from 1.6% in Q2), lifting the the annual rate to 6.7% from 5.3%).
Consumer Price Index — Q3 | The details
Australian inflation outcomes were more elevated than expected in the September quarter, driving the headline CPI (seasonally adjusted) to print with a 7 handle for the first time since the late 1980s and the core rate (trimmed mean) to a new high since 1990.
In the September quarter, headline CPI increased by 1.8% to match the rise seen in Q2. As in recent quarters, new dwelling costs and grocery prices continued to contribute significantly to inflation. There was some relief to cost of living pressures as fuel prices fell in the quarter (their first decline since the pandemic lockdowns of 2020), reflecting the decline in global oil prices and the federal excise tax cut; however, that was more than offset by rising household energy prices, even with varying various state government rebate schemes coming into effect.
Inflation remains overwhelmingly driven by goods, accounting for around three-quarters of the annual increase in the CPI. This is lagging trends offshore where goods-driven inflation is rolling over as supply pressure ease. Services inflation in Australia can be expected to rise from here, in part driven by rising rents.
Upward pressure on new dwelling costs persists with a record number of homes under construction, though Q3's increase (3.7%) was the slowest in a year. Strong demand and supply disruptions are driving up materials and labour costs. Meanwhile, the HomeBuilder grants scheme is still yet to fully unwind, so that process continues to push up new home prices. Given the impact of RBA rate hikes, the unwinding of construction subsidies and the weakening coming through in commencements (down almost 9% over the first half of the year), this should be around the peak for new dwelling costs.
Prices across the grocery basket have risen at elevated rates over the past year reflecting higher costs for producers for inputs and freight and supply disruptions. Recent floods have accentuated pressure on fruit and vegetable prices (16.2%Y/Y). Bread and cereal prices (10%) are up on the back of the shock from the Ukraine war and its disruption to global wheat supply. Dairy prices have risen at their fastest pace since 2008.
Reopening factors continue to remain an important driver of the inflationary pulse. The return to unrestricted travel is driving up both international (25.3%Y/Y) and domestic (10.8%Y/Y) travel costs. Strong demand and the end of state government voucher schemes have seen dining-out costs push through 6% on an annual basis. People getting out and about more often has generated pressure on clothing and footwear prices (5.3%Y/Y), albeit discounting led to a slight fall in Q3 (-0.2%).
Household utilities posted their strongest quarterly rise in 5 years (4.8%) on the back of rises in gas (10.9%) and electricity prices (3.2%). Disruptions in global energy supply stemming from the war in Ukraine have pushed up production costs for domestic wholesalers; however, the flow-through to power bills is yet to fully impact because state government rebates were initiated. The ABS estimates that utilities costs would have risen by almost 12% in the quarter in the absence of the rebates.
Consumer Price Index — Q3 | Insights
Today's inflation outcomes present the likely scenario of the RBA revising up its inflation forecasts in the November quarterly monetary policy statement, due next week following the Board meeting. Having made the decision to downshift to a 25bps hike in October following a string of 50bps hikes, my sense is that the Board is unlikely to turn back to frontloading. Increasingly, the Board and RBA officials have been referencing the lags associated with monetary policy transmission — its tightening cycle has lifted the cash rate by 250bps since April — and the risks building to the economic outlook from offshore. They have also been emphasising the higher frequency of RBA meetings relative to its central bank peers hiking more aggressively. Key also is that wage pressures are assessed as "not inconsistent" with the inflation target in a very strong Australian labour market. While today's report could have implications for the terminal rate and the duration of the hiking cycle, I think the RBA will continue with rate hikes of 25bps.