Australia's latest quarterly inflation report is due from the ABS this morning (1130 AEDT). The 3 rate cuts the RBA has delivered this year have each followed sufficient disinflationary progress in the quarterly CPI reports, with inflation in both headline and underlying terms returning to the 2-3% target band. Today's report however has a different complexion as inflation is expected to have lifted in the September quarter. With the RBA maintaining that labour market conditions - despite softening - remain tight, an uplift in inflation may well see the sequence of quarterly rate cuts put on hold. Markets lean towards the RBA leaving the cash rate steady at 3.6% at next week's meeting, though a further 1-2 rate cuts are still priced in for the remainder of the easing cycle.
September quarter recap: Inflation set to rise, with risks to the upside
In today's report, headline CPI is forecast to print at 1.1% for the quarter (range: 0.7-1.2%), up from 0.7% in the June quarter. This would see the annual pace accelerate from 2.1% to 3%. Core or trimmed mean inflation is expected at 0.8% quarter-on-quarter (range: 0.7-1%), firming slightly from 0.6% in Q2, but with the year-on-year pace holding steady at 2.7%. The risks appear to be skewed to the upside of consensus, due to the most recent monthly CPI readings coming in above expectations.
Over July and August - the front and middle months of Q3 - the monthly CPI indictor has pointed to a pick-up in inflation. The indicator clocked headline CPI running at a 1.9%yr pace in June before lifting to 2.8%yr in July and 3%yr in August. Higher prices for electricity - due to government rebates unwinding - and fuel have driven the rise in inflation. Components such as new dwelling costs and household services have also contributed, pushing up the various measures of underlying inflation in the monthly indicator.
June quarter recap: Inflation eases further; remains within RBA target band
A broad-based easing of inflationary pressures in the June quarter CPI report led the RBA to continue its easing cycle with a 25bps cut to the cash rate (3.6%) at its August meeting. Both headline and trimmed mean inflation slowed in the quarter, keeping the annual rates for both gauges in the RBA's target band for the second quarter in succession - a first since 2013-14.
Headline inflation was 0.7% in the quarter from a prior reading of 0.9%, lowering the annual pace from 2.4% to 2.1%. Trimmed mean CPI printed at 0.6% quarter-on-quarter and 2.7% year-on-year, easing from a 2.9% pace. The downward effect on prices from fuel and electricity due to government rebates largely explains the much lower pace of annual inflation on a headline basis relative to the trimmed mean.
Services categories remain the main driver of inflation; however, services inflation at 3.3% over the year has roughly halved in pace from its peak in 2023 as excess demand coming out of the pandemic has cooled. Price pressures have eased across many services, including rents, insurance, and holiday travel. Goods inflation eased slightly from 1.3% to 1.1% over the year to the June quarter, though it is up from its low at the end of last year (0.8%).
New dwelling costs (0.4%) added to goods inflation in the quarter - after declining in the previous two quarters - and could be set to increase further as the housing market continues to be supported by the RBA's easing cycle. The RBA expects the global tariff regime will be mildly disinflationary for prices in Australia due to weaker demand and goods being redirected, but those effects are yet to play out.
