Australian inflation printed on the top side of estimates in the September quarter, with markets now anticipating the RBA to resume its hiking cycle at the November meeting. While volatile fuel and electricity prices were responsible for the upside surprise in headline inflation (1.2%q/q / 5.4%Y/Y), core inflation (1.2%q/q / 5.2%Y/Y) also came in above expectations.
Consumer Price Index — Q3 | By the numbers
- Headline CPI was 1.2% in the September quarter, above expectations (1.1%) and lifting from 0.8% in the June quarter. Year-ended CPI declined from 6% to 5.4% (vs 5.3% expected).
- The guages of underlying inflation all lifted in the September quarter, increasing 1.2%q/q on an index average basis. The annual pace slowed to 5.3% from 5.9%.
- Trimmed mean CPI printed 1.2% for the quarter vs 1% expected (prior: 0.9%), with the year-ended pace declining from 5.9% to 5.2% (vs 5%).
Consumer Price Index — Q3 | The details
Key inflation outcomes were stronger than expected in the September quarter. Quarterly inflation was 1.2% in both headline and core (trimmed mean) terms; these rates increased from 0.8% and 1% respectively in the June quarter. Year-on-year inflation continues to fall - headline came down to 5.4% from 6% and core eased to 5.2% from 5.9% - however, due to the lift in the quarterly rates, the disinflationary process in Australia can be described as having decelerated in Q3.
The increase in quarterly inflation was driven largely by rises in fuel and electricity prices. Fuel prices surged 7.2%q/q, more than reversing the modest declines in the previous two quarters, as the uplift in global oil prices flowed through to households. Household utility prices rose 3.6%q/q, mainly due to a 4.2% lift in electricity prices, which came as annual price reviews incorporated adjustments for increases in wholesale costs. However, this rise in 'retail' electricity prices was significantly moderated by government rebate schemes; the ABS noted that without the rebates, electricity prices would have risen by an extraordinary 18.6% through the quarter.
Household services prices continued to make a large contribution to quarterly inflation. Rents moderated slightly to 2.2% (from 2.5% in Q2), reflecting an increase in the Commonwealth Rent Assitance scheme that came into effect late in the quarter. Premium increases saw health services rise 1% in the quarter. Inflation continued to remain elevated in categories such as hairdressing services (0.9%q/q / 6.6%Y/Y) and other household services (2.1%q/q / 5.2%Y/Y), indicative of the everyday cost-of-living pressures impacting households.
There was some relief, however, in Q3 as child care prices fell 13.2% due to increases to the Commonwealth's Child Care Subsidy scheme. This was the largest drag on quarterly inflation (-0.14ppt). Meanwhile, grocery inflation declined as fruit (-1%) and vegetable prices (-5.6%) fell in response to an improved winter harvest. In terms of discretionary spending, domestic holiday travel prices fell a further 2.5%q/q - following a 7.2% decline in Q2 - amid the off-peak season.
Looking at a broader breakdown, quarterly inflation for goods was 1.2% and 1.0% for services, with both components increasing from the previous quarter's outcomes (goods 0.9% and services 0.8%). In annual terms, goods inflation fell from 5.8% to 4.9% while services inflation eased from 6.3% to 5.8%. Global factors are contributing to goods disinflation, including eased supply chain pressures and reduced demand. By contrast, services inflation remains elevated reflecting factors such as resilient demand (for holiday travel and other forms of recreation) and businesses passing rises in their input costs through to households.
These dynamics were reflected in tradables inflation (influenced by global factors) cooling to a 3.7%Y/Y pace (from 4.4%); non-tradables inflation (driven by domestic factors) was 6.2%Y/Y (down from 6.9%).
Consumer Price Index — Q3 | Insights
Australia's disinflationary process lost some momentum in the September quarter. While this was unlikely to be a smooth process, RBA Governor Bullock said last night that the Board had taken a more cautious approach to tightening than some other central banks, partly a function of the nature of its flexible 2-3% inflation target. However, it has been made clear that the timeframe forecast for a return of inflation to target in late 2025 was at the limit of what the RBA is prepared to accept. Markets are pricing in additional tightening following today's report.