Australian headline CPI inflation is inside the RBA's 2-3% target band for the first time in the post-Covid cycle, falling sharply in the September quarter on government electricity rebates and a near 7% decline in fuel prices. But elevated price pressures across the core of the basket - and in services - will likely keep the RBA hawkish to near-term rate cut prospects at next week's meeting. Markets went into today's report having pushed back the timing of the RBA's first cut to April/May 2025.
Headline inflation was 0.2% in the September quarter - below the 0.3% outcome expected - its weakest pace since the onset of the pandemic in 2020, falling from consecutive 1% increases across the first half of the year. Annual inflation declined from 3.8% to 2.8% (2.9% expected), a low back to Q1 2021.
Underlying inflation as measured by the RBA's preferred trimmed mean indicator printed at 0.8% for the quarter and 3.5% over the year, both in line with market estimates and softening from the outcomes in Q2 of 0.9%q/q and an upwardly revised 4.0%Y/Y (from 3.9%).
The board below summarises the key details from today's report for the September quarter, comparing the outcomes to the June quarter.
After rising at a 1% pace through the first two quarters of the year, headline CPI fell to 0.2% in the September quarter, swinging on federal and state government rebate schemes on household electricity bills and declines in petrol prices. Combined, electricity and fuel deducted 0.9ppt from quarterly inflation.
Electricity prices fell by 17.3% in the quarter (-15.8%Y/Y) as the Federal government's energy rebate for every household in the nation ($300) came into effect, with additional rebates introduced by state governments also applying in Queensland ($1000), Western Australia ($400) and Tasmania ($250).
Prices at the petrol pump in Australia fell by 6.7% across the September quarter - down 6.2% through the year - reflecting declines in global oil prices due to a weakening demand backdrop. This drove an overall decline of 2.2% in the transport group in Q3, with government subsidies for public transport (-2.1%) in Brisbane, Canberra, Darwin and Hobart also playing a role.
Key movements that pushed up on inflation in the quarter included new dwellings (1%q/q) on the continuation of cost pressures in the home building sector, while grocery prices lifted 0.6% on the back of higher fruit prices (3.5%q/q). Travel costs rose by 1.4% in the quarter due to increased demand for domestic and international tourism. Rents (1.6%q/q) continued to add to inflation; however, increasing support via the Commonwealth Rent Assistance Scheme has seen annual growth in rents moderate to 6.7% from its recent high of 7.8%. The ABS reported that rent inflation would otherwise have increased by 8.5% over the year to Q3.
Looking ahead to next week's RBA meeting, a key aspect of the Q3 CPI report is the breakdown between goods and services inflation. Overall, declining inflation continues to be driven by goods. Global falls in goods and energy prices (as well as the government electricity rebates) have seen goods inflation fall to a 1.4%Y/Y pace - its slowest since Q1 2021.
By contrast, services inflation firmed from 4.5% to 4.6%Y/Y in Q3 - down from the highs of 6.3% in Q2 last year but still elevated. The trajectory of services inflation is key to the RBA's outlook for a return to the midpoint of the 2-3% band, currently forecast for 2026. On the basis of today's report, the RBA looks likely to maintain its messaging on needing to remain vigilant to upside inflation risks, particularly given the strong run of recent labour market prints.