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.
