Australia's September quarter inflation report, due today (11:30am AEDT), appears to have a lot riding on it in terms of the near-term RBA interest rate outlook. The report should confirm annual inflation is continuing to cool from last year's 7.8% peak (5.3% expected). But a return to the RBA's 2-3% inflation target is not anticipated until late 2025, a timeframe that if delayed risks seeing the Board recommencing hiking rates.
Inflation continued to ease in the June quarter...
Australian inflation slowed in the June quarter, continuing the decline from its late 2022 peaks. Headline inflation was 0.8% in the quarter (down from 1.4% in Q1), with the year-ended pace falling from 7% to 6%. Underlying (or trimmed mean) inflation eased to 0.9% in the quarter (from 1.2%) and to 5.9% over the year (from 6.6%). These were the slowest quarterly inflation rates since Q3 2021.
A range of factors contributed to the easing in quarterly inflation. Domestic holiday prices fell sharply (-7.2%) due to off-peak season discounting; government rebate schemes led to modest declines for utilities (-1.1%) and education (-0.2%) costs; meanwhile, health costs eased (-0.1%) as private health insurers delayed premium increases.
Going in the other direction, international travel prices elevated sharply (6.2%) for the peak summer season in Europe. There were solid price rises in furniture and furnishings (4.2%) and for clothing and footwear (0.6%), movements that looked to be counter to the disinflationary trend in global goods prices.
Although annual goods inflation fell from 7.6% to 5.8%, prices lifted 0.9% in quarterly terms - outpacing services inflation (0.8%q/q). However, annual services inflation firmed from 6.1% to 6.3%. Overall, services inflation remained elevated whereas goods inflation continued to slow, albeit this process is lagging the pace of declines seen in other countries.
... but progress may have slowed since
Headline inflation is expected to rise to 1.1% in the September quarter (range: 0.7% to 1.2%), which would be a 0.3ppt lift from the June quarter. The increase is expected to largely reflect rises in fuel and utilities (household energy) prices. Given the 3-month change in the ABS's monthly CPI indicator to August was 1.5%, this suggests there is some upside risk to the expected figure. Annual CPI is anticipated to fall from 6% to 5.3%, the decline reflecting base effects from a year earlier. This is close to the 3-month average (5.2%) of the outcomes from the monthly CPI indicator over June-August. Expectations for core (trimmed mean) inflation are sitting at 1.1% quarter-on-quarter and 5% year-on-year.
Will today's report shift the dial for the RBA?
The RBA - on pause since June - is retaining the optionality to lift the cash rate above its current 4.1% setting. This was communicated in the October meeting minutes that noted the Board "has a low tolerance for a slower return of inflation to target" than its current forecasts project for late 2025; this message was reaffirmed by Governor Bullock in a speech last night. These forecasts are due to be updated for the November meeting, with today's CPI report being a key input to the revised inflation outlook. Markets responded to these developments by lifting pricing for a November hike to around a 40% chance. There is therefore plenty of scope for that pricing to increase in the event of an upside surprise in Q3 inflation.
