Australian employment 42.2k in October; unemployment rate 4.3%

The Australian labour market rediscovered form as the October report beat expectations across the board. Employment increased by 42.2k - its strongest result since April - seeing the unemployment rate fall back to 4.3%, reversing its shock rise to 4.5% last time out. Markets reacted by marking this as the floor for the RBA's easing cycle. The 3-year yield - the most interest-sensitive point on the curve - is up nearly 15bps on the back of today's report to 3.84% - almost 25bps above the current cash rate setting of 3.6%. Pricing a hike as the RBA's next move seems a little premature given the labour market has eased, and temporary factors interrupted with the economy's disinflationary momentum in Q3. Nonetheless, today's report does validate the RBA's decision last week to look through the poor report in September and hold the cash rate steady. 

By the numbers | October 

• Employment advanced by 42.2k in the month, double the expected rise of 20k. This was just the second upside surprise on consensus in the past 6 months. August's gain was downwardly revised to 12.8k from 14.9k. 
• National unemployment fell back to 4.3%, reversing its rise to 4.5% in September and outperforming expectations to print at 4.4%. The underemployment rate (5.9% to 5.7%) and labour force underutilisation (10.4% to 10%) also tightened.  
• Labour force participation held steady at 67%, sitting just below cycle highs, while the employment to population ratio was also unchanged at 64%.   
• Hours worked rose 0.5% month-on-month for the second month in succession, with annual growth lifting from 1.4% to 2.1%.

The details | October 

A much-needed acceleration in employment growth in October saw the unemployment rate rollback from 4-year highs. Employment rose by 42.2k on net in the latest month - full time rising 55.3k as part time fell 13.1k - to post its strongest result since April's 91.1k surge. More evidence will be needed but there are tentative signs that employment is starting to come out of its mid-year slowdown. The 3-month average for employment firmed to 15.1k in October, up from 12.7k in September and 9k in August. 

With the participation rate holding steady at 67%, some 25.2k people joined the labour force in October. As this was far outpaced by the addition of 42.2k people moving into employment, in roads were made into unemployment (-17k). Accordingly, the unemployment rate, which was sitting at its highest level (4.5%) since November 2021 going into today's report, fell back to 4.3%. Increases in underemployment and underutilisation in September were also reversed, suggesting that last month's report was noise rather than signal. Underemployment fell from 5.9% to 5.7%, tightening total underutilisation in the labour force from 10.4% to 10%.  

Rounding out a strong report, hours worked advanced by 0.5% in October and 2.1% over the year. Interestingly, the ABS estimated that hours worked by people in part time roles rose by 0.7% in the month (3.1%yr), that was despite employment in that segment declining. Hours churned out by those working full time lifted by 0.5% month-on-month (1.9%yr). 

In summary | October 

October's increase in employment exceeded even top end of the range of estimates (10-40k) for today's report. That is an encouraging result after employment had clearly slowed through the middle of the year. But the employment data have been volatile in recent times. Markets overreacted to the weak report in September and are probably doing the same now - but in the opposite direction - effectively pricing in a hike as the next move from the RBA whenever it does come. 

Labour market tightness has eased this year: the 3-month average for the unemployment rate is now 4.3%, up from 4% at the start of the year. Although inflation reaccelerated in the September quarter, a range of temporary factors played a role. If inflation does start to fall back - even with labour market conditions remaining broadly as they are - the RBA could still cut again in this cycle. But for the time being, an extended hold looks the most likely course.  

Preview: Labour Force Survey — October

Australia's labour force survey for October is due for release this morning (1130 AEDT). Slowing employment growth over recent months culminated in the national unemployment rate rising to 4.5% in September, its highest level in nearly 4 years. This initially elevated expectations for an RBA rate cut at the November meeting, only to be derailed by a stronger-than-expected rise in inflation in the September quarter. With the RBA subsequently reaffirming that policy is being driven by the inflation side of its dual mandate, markets have provisionally called time on the easing cycle; however, continued softening in the labour market would likely prompt a reappraisal of that view.   

October preview: Conditions expected to stabilise

Markets are largely sitting on the fence going into today's report. Employment is expected to rise by 20k (range: 10-40k), broadly in line with the average expectation (24k) since the March report, following a 14.9k rise in September. After lifting from 4.3% to 4.5% last time out, some retracement is anticipated in the unemployment rate, expected to ease back to 4.4% (range: 4.3-4.5%). Going on recent form, risks appear tilted to the upside for the unemployment rate, due to subdued momentum in employment and near record high labour force participation.

September recap: Unemployment rises to 4-year highs 

Headline unemployment rose unexpectedly to 4.5% in September from an upwardly revised 4.3% in August. This was the highest single reading since November 2021, lifting the quarterly average to 4.3% - also a high back to late 2021. In addition, increases in the underemployment rate from 5.7% to 5.9% and in labour force underutilisation from 10% to 10.4% were indicative of a broader softening in labour market conditions.

Factors on both the demand and supply side played a role in the rise in unemployment. For the 4th time in the past 5 months, employment disappointed expectations lifting by 14.9k (vs 20k) in September - though it more than recouped the decline seen in August (-11.9k). Full time (8.7k) and part time (6.3k) contributed modest gains to employment. 

On the supply side, the participation rate picked up from 66.9% to 67%, adding almost 50k people to the labour force. Because this far exceeded the gain in employment, the unemployment rate moved upwards. Nonetheless, the employment to population ratio - the share of people in work - remained steady at its elevated level (64%). 

Hours worked for September were up 0.5% and rose by 1.4% over the year. In recent times, hours have been volatile from month to month, but over the September quarter total hours were flat compared to the June quarter. 

Australian housing finance surges in Q3

Conditions in the Australian housing market continued to heat up in the September quarter, with lending commitments and loan volumes surging. An RBA rate cut in August, following earlier cash rate reductions, looks to have been a key factor. Activity in the investor segment was especially strong, but the owner-occupier segment was also robust. The first home buyer segment will undoubtedly see a boost in the December quarter from the Federal Government's 5% Deposit Scheme. Despite ABS data previously indicating that housing completions slowed sharply - down around 10% through the first half of the year - lending for new stock was especially strong in the quarter.     

Housing finance commitments accelerated by 9.6% in the September quarter - the fastest rise seen in 4½ years - to a record high level ($98bn). Although rising housing prices are an affordability constraint for many, demand picked up in the quarter, with loan volumes rising 6.4% (141k) to post their largest increase in more than a year. Demand was supported by the RBA lowering the cash rate by 25bps in August, bringing cumulative easing delivered since the start of the year to 75bps. 

Activity in the investor segment was the key driver. Lending ripped 17.6% in the quarter to land at a new cycle peak just short of $40bn. The nation's financial institutions wrote 57.6k new loans to investors in the period - the most on record in a single quarter - to mark a 13.6% increase on the June quarter. As the summary table above shows, activity right across the segment was strong, but notably so in the construction-related area. 

Owner-occupier lending increased by 4.7% to $58.2bn, its highest level since the peak in early 2022, on the eve of the RBA's tightening cycle. That increase was more the double the rise seen in underlying loan volumes, which increased by 2% to 83.8k. This leaves a basic interpretation of the effect of rising housing prices, where the pace of lending rose by more than the growth in demand. As with investors, demand for new stock was a key factor.  

Macro (Re)view (7/11) | Equities step back

Risk-off sentiment weighed on equity markets this week due to elevated tech sector valuations; the ongoing US government shutdown; and uncertainty over the Fed cutting rates in December amid concerns over the health of the US labour market. The tech-heavy Nasdaq saw its largest weekly fall since early April in the wake of Liberation Day, and the broader S&P 500 was down by its most in a month. While the US dollar has of late reconnected with its safe-haven status, that trade lost some momentum this week. Treasury yields were little changed across the curve.

Domestically events this week were led by the RBA's latest policy meeting. The Monetary Policy Board (MPB) surprised no one in leaving the cash rate at an unchanged 3.6% following a stronger-than-expected upturn of inflation in Q3. My review (see here) covers the meeting in more depth, but the key take away was that the MPB looks to have set the stage for an extended pause. 

Upward revisions to the RBA's inflation forecasts in the latest Statement on Monetary Policy, and the expectation that the full effects of its earlier rate cuts (75bps in total) are still playing out, has the MPC taking a cautious stance. At the post-meeting press conference, Governor Bullock said some of the recent rise in inflation was likely due to temporary factors, but inflation had also lifted in housing construction and market services - components where inflation has been more persistent. Markets lean towards the RBA cutting once more in this easing cycle, but not until well into next year. 

A range of Australian data points came through during the week. Household spending slowed to a 0.2% rise in September, while underlying volume growth softened in the quarter (see here). Dwelling approvals saw a sharp 12% rebound in September but still remain at subdued levels despite RBA easing and accelerating housing price gains (see here). Surging non-monetary gold exports (62.2%) amid record high prices and safe-haven demand saw the trade surplus widen to $3.9bn in September from a 7-year low in August (see here).  

The continuing government shutdown in the US deprived markets of the October payrolls report, amplifying the focus on alternative indicators to gauge the health of the labour market. Although, ADP payrolls (+42k) outperformed expectations, markets appeared more concerned about a surge in layoffs (153k) in the Challenger series. Although the Fed has articulated its focus is on the employment side of its mandate, markets are struggling to gauge the level of softening it would need to see in the labour market to justify a December rate cut, due to the lack of hard data and varying views on policy by FOMC members. 

In the UK, the Bank of England's Monetary Policy Committee (MPC) left Bank Rate on hold at 4% this week. The decision proved to be tight. Members Ramsden and Breeden crossed over to join Committee doves Dhingra and Taylor in voting for a 25bps cut, leaving the 'hold' bloc on the slimmest majority possible (5). That bloc includes 4 members with strongly held views around upside risks to inflation in the UK: Greene, Lombardelli, Mann and Pill, plus Governor Bailey.   

But Bailey is not far off voting to cut rates according to his summary views - a new section now included in the meeting minutes where each MPC member outlines their key thoughts on economic conditions and policy. For Bailey, if the incoming data confirms his view that inflation risks are now 'less pressing', his position is that 'further policy easing' would be appropriate.

While much has been said and written about the divisions over at the Fed, the BoE is arguably even more divided. The BoE's central forecasts in its Monetary Policy Report were little changed from its previous update in August; however, each MPC member attaches different weightings to the various risks the UK economy is facing, resulting in alternative views over the path for interest rates. There was also a sense at this meeting that the government budget to be tabled later this month will be a key part of the puzzle.  

At the post-meeting press conference, Bailey said that the judgment of the MPC is that inflation has now peaked, following an uptick over the past year or so. But given headline CPI is 3.8% and underlying CPI is 3.5% - both well above the 2% target - a key risk was that inflation fails to fall back on the BoE's expected trajectory. At the same time, however, Bailey pointed to weak momentum in the economy and a slowing labour market, dynamics that pose risks to inflation falling below target. 

Australia's trade surplus rebounds in September

Australia's goods trade surplus rebounded to $3.9bn in September, broadly in line with expectations ($4bn) after falling to a 7-year low of $1.1bn in August. Exports (7.9%) increased at multiples of the rise in imports (1.1%), driven by non-monetary gold (62.2%) amid record high prices and strong demand for the safe-haven commodity.    

The trade surplus widened from a 7-year low in August ($1.1bn) to $3.9bn in September, averaging $3.8bn across the quarter. The monthly trade figures through 2025 have been highly volatile, reflecting developments in underlying global trade flows as the US administration has brought its regime of broad-based tariffs to fruition. 

On a quarterly basis, the goods surplus increased to $11.4bn from $10.7bn in the June quarter, a rise of 7%. This came on the back of exports expanding by 1.9% to $131bn, outpacing a 1.4% lift in imports to $120bn. Given the movements in trade prices in the quarter: exports -0.9% and imports -0.4%, goods trade looks to have broadly neutral implications for GDP growth in Q3. Trade in services - not captured in these data - will largely determine how the net exports component has contributed to quarterly GDP.  

To the monthly figures and exports rose at pace in September, up 7.9% from August - the sharpest month-on-month rise since April 2022 - to $44.6bn. Annual growth swung from -4% to 9.7% on September's result. Record high prices and strong demand underpinned a 62.2% surge in non-monetary gold exports, after the commodity inexplicably declined in August (-47.2%). Much of the growth in exports over the past year has come from non-monetary gold (included in the grey bars in chart below). 

Export growth in September was also supported by iron ore seeing its fastest rise (9.7%) since the start of 2023, while coal (4.1%) and metals exports (14.1%) advanced. Overall, non-rural goods lifted by 3.7% in September, more than rebounding from August's 2.9% decline. Rural goods rose slightly in the month (0.7%), with meat (2.7%) the key driver.    

Import spending slowed to a 1.1% rise in September ($40.6bn) from a 3.3% gain in August; however, annual growth increased from 8.2% to 11.1% - its fastest pace since February 2024. September's rise in imports was driven entirely by capital goods (6.7%), with declines coming through in consumption (-1.2%) and intermediate goods (-0.4%).    

RBA on hold in November

The RBA left the cash rate on hold at 3.6% at today's meeting in Sydney. The decision was straightforward as the Monetary Policy Board (MPB) voted unanimously to hold after inflation came in 'materially higher' than it had expected in the September quarter, reaccelerating towards the top of the 2-3% target band and prompting the RBA to raise its inflation forecasts for the coming year. The sense is the MPB is setting up for an extended pause. Having already been cut by 75bps since the start of the year, the MPB has got the cash rate closer to a neutral setting where it will move cautiously. With risks to domestic growth and inflation seen as balanced, Governor Bullock highlighted the importance of retaining optionality to respond to the incoming data. Markets see one further cut to the cash rate in this easing cycle as the most likely scenario.   

Australia's Q3 inflation report was by far the most influential development for the MPB since its previous meeting in late September. Inflation rose more steeply than the RBA had been expecting in the quarter, seeing headline CPI jump from 2.1% to 3.2%Y/Y while trimmed mean or core CPI lifted from 2.7% to 3%Y/Y. At the post-meeting press conference, Governor Bullock said that while temporary factors - such as electricity rebates and council rates - were at play in Q3, more persistent price pressures in areas such as housing construction and market services were also part of the story.   

On the back of these upside surprises, the RBA raised its inflation outlook in today's Statement on Monetary Policy. It now sees headline CPI ending 2025 at 3.3% (up from 3%), 3.2% in 2026 (from 2.9%) and then 2.6% in 2027 (from 2.5%). Core CPI for 2025 was upped to 3.2% from 2.6% before easing back to 2.7% in 2026 (from 2.6%) and then 2.6% in 2027 (from 2.5%). 

Importantly, the MPB is also taking some signal from the inflation data about economic conditions more broadly. Because inflation lifted and is above the midpoint of the target band, the MPB judges that demand continues to outweigh supply in the economy, with tightness remaining in the labour market. While the earlier rate cuts have already supported household spending and the housing market, the MPB believes that there is more to play out. 

That is reflected in the growth outlook that has lifted from 1.7% to 2% this year. While there was a downgrade to growth next year from 2.1% to 1.9%, the forecast for 2027 remained at 2%. With the outlook for resilient growth remaining intact, the RBA sees little further softening in the labour market. Forecast unemployment has ticked up from 4.3% to 4.4% across the projection horizon. The next RBA monetary policy meeting is set for 8-9 December. 

Preview: RBA November meeting

Last week's hotter-than-expected inflation report in Australia looks to have closed the door on an RBA rate cut at today's meeting, with the cash rate expected to be held at 3.6% (due 1430 AEDT). This point has been arrived at after a tug of war in market pricing has played out over recent weeks. Initially, expectations for a 25bps cut rose sharply following weak labour market data. Cautious RBA commentary then tempered those expectations before markets threw in the towel on a rate cut as inflation reaccelerated to the top of the target band in the September quarter. Markets see the RBA cutting again in this easing cycle, though not until well into next year. New forecasts to be published alongside today's decision in the Statement on Monetary policy will be key to the rates outlook, as will Governor Bullock's post-meeting remarks.    

The RBA's sequence of quarterly rate cuts that has seen the cash rate fall by 75bps this year is set to be broken today. Confirmation of inflation declining towards the 2-3% target band in the key quarterly CPI data paved the way for rate cuts in February, May and August. But a setback occurred last week as headline CPI in the September quarter rose from 2.1% to 3.2%Y/Y and the core or trimmed mean firmed from 2.7% to 3%Y/Y, outcomes that indicated inflation picked up more quickly than the RBA had been expecting. 

As a result, the RBA's year-end forecasts for headline CPI of 3% and core CPI of 2.6% are likely be revised higher. That may have implications for the return of both measures to the midpoint of the target band, currently not forecast until 2027; however, that is less clear cut. Market pricing, which the RBA inputs into its projections, has shifted hawkishly such that the cash rate is now expected to bottom out around 3.3% compared to around 3% previously. 

Stronger-than-expected inflation will not only be viewed in terms of the target band but also what it implies about economic conditions more broadly. Notably, it gives weight to the RBA's assessment that the labour market remains tight, even though the unemployment rate crept up to average 4.3% in the September quarter, in line with the RBA's forecasts. This suggests that associated risks to inflation from labour costs will remain relevant for policy. Higher inflation might also be taken as a sign of the strength in demand in areas including household consumption and the housing market, supported by the RBA's earlier rate cuts.

Australian dwelling approvals rebound in September

Australian dwelling approvals lifted by 12% on the month in September, rebounding well above expectations (5%) after declining in July (-10.3%) and August (-3.6%). The result was driven by a wave of approvals in the volatile unit segment (23.7%) going through, but detached house approvals also put in a strong result (4.4%) to rise by their most since March 2024. Housing prices have picked up alongside the RBA's easing cycle, but the housing pipeline has been slower to respond.  

National dwelling approvals rose by 12% to 17k in September, recovering most of the drop seen over the prior two months. That took approvals to 48k across the quarter, little changed (0.1%) from their total in the June quarter. Although unit approvals surged in September (23.7%), they rose only modestly for the quarter as a whole (0.7%), weighed by falls in July (-22%) and August (-6.8%). House approvals posted their strongest rise in 18 months in September (4.4%) but still softened slightly in the quarter (-0.3%). 

Within the unit segment, larger developments will generate more approvals and so the high-rise category has been the key area of strength, particularly in Sydney, Melbourne and Brisbane. Townhouse and low-rise developments also look to have provided some support. 

Detached approvals have disappointed in 2025, yet to fire despite the RBA easing rates and housing prices accelerating, up a further 1.1% nationally in October - their fastest gain in 2 years according to today's report from Cotality. The approvals data are simply too volatile to have any firm view as to whether not September's 4.4% rise signals a shift in momentum. 

Australian household spending up 0.2% in September

Australian household spending increased by 0.2% in September, rebounding by less than expected (0.4%) from a flat month in August. Goods and non-discretionary categories were the key drivers of the gain in headline spending. Factors including the RBA's easing cycle and earlier fiscal support measures helped drive a rebound in consumption in recent quarters; however, that slowed to a 0.2% rise in inflation-adjusted spending in the September quarter - the softest outcome in a year. 

Spending rose by 0.2% at the top line level in September to $77.4bn, lifting annual growth from 4.9% to 5.1%. Gains were concentrated in areas of non-discretionary spending (0.6%), including food (0.6%) and health (0.7%). This offset another weak month for discretionary spending (0%), after it declined modestly in August (-0.1%). Discretionary spending was propped up by recreation and culture (includes holiday travel) rising by 1.1% as it rebounded from falls in July (-0.4%) and August (-1.1%); furnishings and household equipment also fell in the prior two months but saw a more modest recovery in September (0.4%). The major categories of weakness in September were alcoholic beverages (-0.8%), clothing and footwear (-0.6%), transport (-0.4%) and hotels, cafes and restaurants (-0.3%).  

In the latest quarter, household spending rose by 1.1%, but once adjusted for inflation, consumption volumes saw just a 0.2% rise, slowing from gains that ranged from 0.6% to 1% over the previous three quarters. That strong period for consumption underpinned the rise in GDP growth to 0.6% in the June quarter; however, based on today's number, with household consumption being the largest component of the economy, there are immediate downside risks to growth in the September quarter.  

Macro (Re)view (31/10) | Fed casts doubt on December cut

Corporate earnings underpinned by AI investment and resilient spending supported further equity gains in the US, though Europe declined and Asia was mixed. A Fed meeting that was seen as more hawkish than expected despite a 25bps rate cut saw Treasury yields rise, a tailwind for the US dollar along with progress in US-China trade negotiations that saw President Trump suspend his threat of 100% tariffs. The Bank of Canada also cut by 25bps this week, while the Bank of Japan and ECB held steady. In Australia, the RBA looks set to extend its pause on rate cuts next week following hotter-than-expected inflation in Q3.    

In the US, the Fed's 25bps rate cut to a 3.75-4% range was broadly seen by markets in a hawkish light. The rate cut this week was fully anticipated, but Chair Powell at the post-meeting press conference cast doubt over the 25bps cut markets were pricing in for the December meeting, saying the outcome was far from a 'foregone conclusion'. The data vacuum caused by the government shutdown is concerning the Fed, with Powell saying that given the lack of visibility over economic conditions it made sense to move with caution. 

The Fed's reaction function is currently weighted towards the employment side of its dual mandate, where Powell reaffirmed downside risks had increased. On inflation, Powell's summation was that tariff-related effects had pushed up near-term inflation expectations, but tariffs were still expected to be a 'one-time' shift in prices rather than sparking another wave of inflation.          

Little excitement was expected at this week's ECB meeting, and little was delivered as the Governing Council left rates on hold in Florence, with the key depo rate remaining at 2%. This decision extended the ECB's pause to a third consecutive meeting, following its easing cycle that has already delivered 200bps of easing since June last year. 

At the post-meeting press conference ECB President Lagarde gave no sense that further cuts are on the radar saying that the decision this week was unanimous - somewhat of a rarity for the Governing Council - and continued to reaffirm that policy remained in a 'good place'. Lagarde was generally upbeat in her post-meeting remarks, notably around the growth outlook where she said trade negotiations and the ceasefire in the Middle East had reduced downside risks. 

Although euro area GDP growth in Q3 came in subdued at best at a 0.2%q/q and 1.3%Y/Y - softening from 1.5%Y/Y previously, Lagarde said those outcomes had beat the ECB's forecasts. Meanwhile, inflation remains around the 2% target - headline printed at 2.1%yr in October (from 2.2%) and core was steady at 2.4%yr - and risks to the outlook were balanced according to Lagarde.

Renewed inflationary pressures were realised in the September quarter, driving a hawkish shift in the Australian rates curve. An RBA rate cut next week has effectively been priced out - and the next 25bps cut has been pushed back to mid next year - after upside surprises in the quarter drove headline CPI (1.3%q/q) from 2.1% to 3.2%Y/Y (vs 3% expected) while core CPI (1%q/q) firmed from 2.7% to 3%Y/Y (vs 2.7%), leaving both measures right at the top of the 2-3% target band (see my full review here). 

The fading effect of government rebates on electricity bills pushed up headline inflation, but the firmer core rate suggests higher prices were seen more broadly across the basket. The report will probably not unnerve the RBA - it had been suspicious inflation was running ahead of its August forecasts for 3% headline and 2.6% core by year-end - but it will likely be taken as a signal that validates some of its recent caution on further easing, as well as its key judgment that labour market conditions - in spite of the rise in the unemployment rate to 4.5% - remain tight. Watch out for my RBA preview to be published ahead of the meeting next Tuesday for more analysis. 

Australian Q3 CPI 1.3%, 3.2%Y/Y

Renewed inflationary pressures in Australia were stronger than expected in the September quarter, seeing markets throw in the towel on an RBA rate cut next week. Headline CPI rose through the top of the target band to 3.2% year-on-year, after falling to the bottom end of the band in the June quarter (2.1%). Electricity prices (9%q/q) were the main driver, with state government rebates fading out and the extension to the federal government's scheme not yet fully phased in. Trimmed mean or core inflation also lifted from 2.7% to 3% year-on-year - well above the RBA's forecast for 2.6% by year-end - a sign that prices rose broadly across the basket. Market pricing for an RBA rate cut on Tuesday had already lengthened ahead of today's report, falling to around a 35% chance on hawkish comments from Governor Bullock on Monday night. However, pricing still implies markets see the RBA cutting further this cycle, a view that suggests higher inflation is unlikely to be sustained and due to cooling labour market conditions.       

Headline CPI rose by 1.3% in the September quarter, well up from 0.7% in the June quarter and stronger than the expected figure of 1.1%. This accelerated annual inflation to 3.2% from 4-year lows previously (2.1%). The uplift was driven by a surge in measured electricity prices, up 9% in the quarter and 24.6% over the year. Meanwhile, fuel prices (2%q/q, -1.6%Y/Y) are now pushing down on overall inflation by much less than in recent quarters. Inflation in key parts of the basket - notably household services and groceries - remain stubborn, while new dwelling costs picked up again after lifting by 1.1% in the quarter. 

Significant state government rebates on household electricity bills that were in place 12 months ago in Queensland ($1k), Western Australia ($400), and Tasmania ($250) have concluded, and the federal government's rebate scheme ($150) that was extended is being applied on differing schedules from state to state. Annual price reviews also took place in Q3. These effects are all pushing up electricity prices.    

At a broader level, one of the main themes in the latest quarter was that goods inflation accelerated by 1.3% - its fastest quarterly rise since Q4 2022 - with the annual pace jumping from 1.1% to 3%. The main contributors this quarter were electricity (9%), new dwelling costs (1.1%), fuel (2%), utilities (6.7%) and tobacco (2.9%). 

Services inflation was 1.3%, up from 0.7% in Q2. The annual pace firmed from 3.3% to 3.5%, but despite rising it is still significantly lower than it was 12 months earlier (4.6%) and at the 2023 peak (6.3%). For Q3, the main factors behind higher services inflation were: domestic holiday (3.2%) and international travel (2.7%) as demand picked up during the school holiday period; property rates and charges (6.3%) with their largest rise since 2014; rents rose 1%, and restaurant meals were up 1.2%.          

For the RBA, the main take away from today's report will probably be the uplift in trimmed mean inflation from 2.7% to 3% year-on-year. This is the figure that tends to guide policy - more so than headline inflation, particularly at the moment with headline inflation very noisy due to electricity rebates and other volatile price movements. The trimmed mean indicates inflationary pressures across the most stable parts of the basket are running at the top of its target band. 

That said, the RBA is still sitting in a fairly good place, with the trimmed mean having fallen from its peaks near 7% in late 2022. It is likely that 3% trimmed mean will validate some of the RBA's pre-existing views that the labour market remains on the tight side, its earlier rate cuts are working as intended, and that inflation risks remain. That all aligns with the RBA's recent caution on further cuts.