Australia's September quarter CPI inflation report is due for release at 11:30am (AEDT) today. Government rebates and cost of living support will revive the disinflationary process in Australia that slowed over the first half of 2024. Headline inflation is expected to print at 0.3% in the quarter, potentially lowering the annual pace inside the RBA's 2-3% target band. But with inflation falling due to one-off factors and underlying CPI seen easing more modestly, RBA rate cuts look to remain off the table near term. Pricing for the RBA's first cut has been pushed back well into 2025 - a function of the RBA's communication, strong domestic labour market data, and the hawkish reappraisal of the Fed's easing cycle.
September quarter preview: Headline CPI to fall on rebates; core more resistant
Headline inflation is expected print at 0.3% quarter-on-quarter (range: 0.2-0.4%) and 2.9% year-on-year, down substantially from its current pace (1.0%q/q, 3.8%Y/Y). Government rebates on electricity bills came through in the September quarter, while other cost of living supports - rent assistance and public transport subsidies - and lower fuel prices are also key factors. Excluding these (and other) volatile components, trimmed mean (or core) CPI is forecast at 0.7% quarter-on-quarter (range: 0.3-0.8%) and 3.3% year-on-year, down from 3.9%.
These estimates for annual inflation (headline 2.9%, trimmed mean 3.3%) compare to the RBA's year-end forecasts of 3.0% headline and 3.5% trimmed mean. The RBA currently projects inflation won't return sustainably to the midpoint of the target band until 2026. More on Australia's current inflation dynamics is covered in the recap section below.
Monthly CPI data reported a 6.4% decline in electricity prices in July into a 14.6% fall in August as government rebates came in. The larger fall in August reflects the Commonwealth government rebate scheme ($300 over 4 quarters) broadening to all states and territories after applying only to Queensland and Western Australia in July. Separate rebate schemes introduced by the state governments in Queensland ($1000), Western Australia ($400) and Tasmania ($250) commenced in July. Other cost of living supports - the Commonwealth Rent Assistance scheme and public transport subsidies (Brisbane, Hobart and Darwin) - will also lower inflation in Q3.
Declines in fuel prices are another key factor in the most recent quarter. A weakening global demand backdrop has weighed on oil prices in recent months, translating to a 5-6% fall in prices at the petrol pump in Australia across July and August. Compared to 12 months ago, fuel prices are down by 7.6%.
A recap: Inflation remained elevated in the June quarter
Disinflationary progress in Australia slowed over the first half of the year leaving annual inflation still well above the RBA's 2-3% target band. Headline CPI was 1.0% in the June quarter - an unchanged pace from Q1 - the annual rate firming from 3.6% to 3.8%. Trimmed mean inflation came in at 0.8%q/q and 3.9%Y/Y, easing slightly from the outcomes in the March quarter (1.0%q/q and 4.0%Y/Y).
Above-target inflation continues to be underpinned by market services and housing-related costs, though inflation has eased in both areas. Market services inflation cooled to a 4.1%Y/Y pace in Q2, down from its highs of a year earlier (6.8%) as demand for discretionary services such as dining out, entertainment, and travel has softened.
Housing inflation at 5.2%Y/Y has roughly halved from its peaks. New home building costs have slowed as higher interest rates have weighed on housing construction while materials and labor shortages have become less acute. Although still at 15-year highs (7.3%), rent inflation has been curtailed by increases to the Commonwealth Rent Assistance scheme announced last year.
Other factors have also contributed to the decline in headline inflation. Notably, global disinflationary trends in goods and energy prices continued to filter through to Australia in Q2, while inflation across the grocery basket has declined significantly over the past year..
