Australian Q3 Wage Price Index 0.8%; 3.5%yr

A below consensus increase of 0.8% (vs 0.9% forecast) in Australia's Wage Price Index (WPI) in the September quarter saw annual wages growth retrace below 4% for the first time since the middle of 2023. Wage pressures are easing across the labour market with conditions past cycle tights and as wage-setting processes adjust to slower inflation. Annual wages growth slowed from 4.1% to 3.5%, well down from the highs of 4.3% seen at the end of last year. In both 3- and 6-month annualised terms, wages growth is now at 3.2%. 

While the RBA judges the labour market to be tight relative to full employment (more insights will be available in tomorrow's labour force survey for October), today's report suggests that inflationary pressures generated in the labour market are cooling. If a return to trend rates of productivity growth of around 1% can materialise, wages growth at the current pace would - on paper at least - be broadly consistent with inflation at the midpoint of the RBA's 2-3% target band.    

The WPI - a measure of the growth in base wages (excluding bonuses and other incentives) across a fixed basket of jobs in the domestic labour market - increased by 0.8% for the third consecutive quarter in Q3. This is notable because the wage-setting process in Australia typically generates a spike in wages growth in Q3, incorporating the increases to the national minimum wage and end-of-financial-year wage reviews for employees on individual agreements. Although this spike still occured in 2024, these factors boosted wages growth by less than last year. 

The Fair Work Commission - a statutory body independent of the political process that as part of its remit determines minimum wage and award rate settings in Australia - settled upon a 3.75% rise in the minimum wage in its 2024 decision, down from a 5.75% increase in 2023. Minimum wage decisions tend to have spillover effects on pay rates in other parts of the labour market. The ABS reported that an almost identical share of jobs received a pay rise in Q3 this year (45%) compared to last (46%); however, the average size of that pay rise in 2024 was 3.7%, significantly below the peak of 5.4% in 2023. Moreover, the distribution of wage rises now sees the largest share of jobs (34.1%) receiving a pay rise in the 3-4% range; whereas a year ago, this was sitting in the 4-5% range (for 27.4% of jobs). 

By sector, growth in private sector wages is cooling noticeably. The quarterly rise in Q3 was 0.8%, with annual growth slowing from 4.1% to 3.5%, a 2-year low. The average pay rise in the sector has slowed across the past year from 5.8% to 3.9%. Even if bonuses are included, private sector pay saw a more moderate increase of 1.7% quarter-on-quarter and 3.6% year-on-year than in 2023 (2.1%q/q, 4.3%Y/Y). 

In the public sector, wages increased by 0.8% in the latest quarter to be up by 3.7% through the year, softening from 3.9% previously and below the 4.2% cycle high. The average pay rise going through in Q3 was 3% compared to the high of 4.3% in the final quarter of last year. 

At the industry level, wages growth is now decelerating at a faster pace across major parts of the labour market. Of particular focus for the RBA has been wages growth in the services sectors. Based on the latest inputs, my measures of wages growth in business and household services show an easing from 3.7% to 3.2%Y/Y and 4.5% to 3.7%Y/Y respectively. 

Preview: Wage Price Index Q3

Australia's update of the Wage Price Index (WPI) for the September quarter (Q3) is due at 11:30am (AEDT) today. Robust labour market conditions have underpinned strong wages growth, and the RBA as recently as last week reaffirmed that at the current pace of around 4%, annual wages growth was inconsistent with its 2-3% inflation target given the prevailing weakness in productivity. This factors into market pricing that has RBA rate cuts out of the profile until mid-2025. Today's report is unlikely to shift this outlook even with wages growth moderating below 4% in Q3. 

Q3 Preview: Wages growth expected to hold a strong pace 

Headline wages growth is expected to come in at 0.9% in the September quarter, with estimates ranging from 0.8% to 1%; an outcome on consensus would slow annual growth from 4.1% to 3.6% - assuming no revisions to prior quarters. Wage settings in Australia are boosted in Q3 following end-of-financial-year wage reviews (for workers on individual agreements) and as the decisions on increases to the minimum wage from the Fair Work Commission start coming into effect. The size of the boost from these factors is expected to be down on last year, driving the forecast slowing in year-on-year wages growth.     

Labour market conditions remain tight by historical standards but have eased over the past year. The unemployment rate has lifted from an average of around 3.7% in Q3 2023 to 4.1% currently. Alongside this, the average pay increase in the private sector has slowed from a peak of 5.8% to 4.2% by Q2 this year. Meanwhile, the Fair Work Commission settled on a 3.75% increase to the National Minimum Wage in its 2024 decision, down from a 5.75% rise in 2023. 

A recap: Wages growth remained around 15-year highs in the June quarter  

The WPI increased by 0.8% in the June quarter - a touch soft relative to expectations (0.9%) -holding at 4.1% year-on-year, a pace little changed since the middle of 2023. Wages growth above 4% is tracking at its fastest pace since 2008/09, after falling to record lows of 1.4% during the 2020 pandemic crisis. The rebound was driven by the significant tightening that occured in the labour market coming out of the pandemic, with employment surging during a time of border restrictions, and wage-setting processes catching up to high inflation. 

Private sector wages growth is slowing with tightness in the labour market easing. Quarterly wages growth in the sector in Q2 was 0.7% - its slowest increase since late 2021 - with the annual pace moderating from 4.2% to 4.1%. In the public sector, wages growth in Q3 (0.9%) outpaced the private sector, though the annual pace was softer at 3.9%.   

Macro (Re)view (8/11) | US exceptionalism defines pivotal week

The reaction to the Republicans sweeping into power saw equities advancing to record highs alongside higher yields and a stronger dollar on Trump's pro-growth fiscal agenda, moves largely foreseen pre-election. However, across the course of the week, the curve inverted, with the Fed indicating it would move towards a more measured approach to easing. European assets were the clear point of weakness, equities underperforming and the euro falling with the prospect of increased tariffs intensifying the headwinds to the growth outlook and the implosion of the German government key developments. 

A 25bps rate cut from the Fed to 4.5-4.75% continued the process of recalibrating policy away from restrictive settings. While rates in the US will continue to fall, markets took away from the meeting that the pace of easing is likely to slow. Post-meeting pricing indicates that markets see the December meeting as a line-ball call between a hold or a 25bps cut, leaving the data to shape expectations one way or the other over the coming weeks. Over the next 12 months, rates are seen falling to the 3.75-4.0% range; however, that outlook will clearly be subject to the policies enacted by the new administration - something that Chair Powell would not speculate on during the post-meeting press conference. Away from the election, Chair Powell said the focus for Fed was in managing the risks to the economy from moving either too quickly or too slowly in returning rates towards a more neutral setting. Key observations on the economy from Chair Powell included downside risks to growth had eased; the labour market was no longer a major source of inflationary pressures; while core inflation remained elevated relative to the 2% target.   

A second cut for the easing cycle from the Bank of England (BoE) was voted through by the Monetary Policy Committee (MPC) in an 8-1 analysis, lowering Bank Rate by 25bps to 4.75%. The higher level of alignment amongst MPC members compared to the narrow majority (5-4) that cleared the first cut in August was dovish; however, with the UK budget measures expected to boost both growth and inflation, the guidance that a 'gradual approach' would be taken in dialing back restrictive monetary policy settings was reaffirmed. Market pricing implies the BoE is expected to continue to cut rates on a quarterly profile, with the next cut coming in February. Further out, markets see rates being cut to 4% by Q3 next year, up from 3.75% priced before the UK budget.    

The effects of the measures in the UK budget were incorporated into the BoE's latest forecasts in the November Monetary Policy Report. The BoE forecasts that the measures will boost growth by around 0.75ppt over the coming year, driving an uplift in the GDP growth outlook for 2025 from 0.9% to 1.7%. Stronger activity, however, is expected to add to inflationary pressures, pushing up the forecast for CPI in 2025 from 2.2% to 2.7%. This has lengthened the glide path for the return of inflation to the 2% target, pushed back from 2026 into 2027. While these are the modelled effects, there is significant uncertainty for the BoE in how the measures will work through the economy. Accordingly, the message from Governor Bailey in the post-meeting press conference was that the situation warranted moving cautiously in lowering rates. 

In Australia, the RBA remained on hold at 4.35% on the cash rate, bringing up 12 months of steady rates. Governor Bullock's pushback to rate cuts has not waivered and that has been a factor in markets repricing the first cut well out into the middle of next year. Updated forecasts published in the Statement on Monetary Policy were largely unchanged from the August round, with a return to the 2-3% inflation target band still projected for 2026 - despite the sharp decline in headline inflation in Q3. Detailed analysis of the RBA meeting is available in my review here. On the data front, a weakening terms of trade continues to see the trade surplus narrow coming in at $4.6bn in September (see here). 

Australia's trade surplus narrows to $4.6bn in September

Australia's goods trade surplus narrowed to a 6-month low of $4.6bn in September, a below expected figure ($5.3bn) and down from $5.3bn in August (revised from $5.6bn). Lower commodity prices continued to weigh on exports, posting their largest decline in 15 months (-4.3%) to be down more than 10% over the year. Imports also fell through the month (-3.1%), swinging annual growth from 3.2% to -7.8% - its weakest pace since the start of 2024. The overall dynamics are Australian dollar negative; a weakening terms of trade - export prices (-4.3%q/q, -6.8%Y/Y) are falling by more than import prices (-1.4%q/q, -1.1%Y/Y) - is compressing the trade surplus. 

September's trade surplus of $4.6bn was the narrowest since March, with the Bureau also revising lower its estimates of the surpluses reported over recent months. As a result, the 3-month average for the trade surplus came in at $5.1bn for the September quarter, its equal lowest since Q4 2020. 

Export earnings fell 4.3% in September to $40.8bn, a still-elevated level by any historical measure but well down from the peaks of 2022 when the tailwinds from the global recovery out of the pandemic drove up commodity prices. That cycle has retraced over the past year - the non-rural component of the RBA's index of commodity prices was down 14.5% (AUD terms) for the year to September - resulting in exports falling 10.2%. The chart below shows the main driver of that decline has been non-rural goods, a category dominated by the major resources. 

Quarterly exports moderated by 1.2% to $126.4bn, a near 3-year low. Key movements across the quarter were non-rural goods falling 1.9% on declines in other mineral fuels (mainly LNG) (-11.9%) and iron ore (-0.9%). This was partly offset by a 5.1% quarterly increase in rural goods as the value of meat (5%) and rural products exports (8.7%) lifted.    

Following declines of 1.1% in July and 0.2% in August, import spending contracted a further 3.1% in September to $36.2bn, down 7.8% on record highs from 12 months ago ($39.3bn). Driving the decline over the past year has been intermediate goods (-6.7%) - due to fuel imports falling (-12.8%) on lower prices - and capital (-16.9%) and consumption goods (-2.1%) weakening on softer domestic demand conditions.  

In quarterly terms, import spending eased 1.1% to $111bn, a level only marginally below the peak from the first quarter of the year ($113.4bn). The decline in the most recent quarter was driven by intermediate goods (-2.6%) - again due to falling fuel imports (-9.5%) on lower prices - and consumption goods (-1.4%), with weakness in vehicle imports (-9.2%) and household electrical appliances (-8.1%) the driving factors.   

RBA extends pause in November

The RBA left the cash rate on hold at 4.35% (and the ES rate at 4.25%) at today's meeting, marking 12 months of unchanged monetary policy settings in Australia. There was little reaction in either the bond or FX market, with pricing for an RBA rate cut remaining all the way out in May next year following today's decision statement, updated economic forecasts in the Statement on Monetary Policy, and Governor Bullock's press conference. The RBA has not moved from its assessment that aggregate demand in the economy is exceeding supply, reaffirming that rates need to be kept 'sufficiently restrictive' with inflation still not expected to return 'sustainably' to the 2-3% target range until 2026. 

The main shift in today's statement compared to the September meeting was the Board's emphasis on underlying inflation. This came after headline inflation declined from 3.8% to 2.8% year-ended in Q3, falling inside the 2-3% target range on electricity rebates and lower fuel prices. Today's statement noted that underlying inflation was a better gauge of the momentum of inflation, and at 3.5%Y/Y (down from 3.9%) it remained elevated to target.    

Accordingly, the Board clarified that its priority is to return inflation to target 'sustainably'. For this to occur, underlying inflation needs to decline further. In the post-meeting press conference, Governor Bullock highlighted that lower services inflation and an easing in the pace of wages growth will be key to achieving this. But this is expected to be a protracted process; based on today's updated forecasts, underlying inflation is not seen returning to the midpoint of the target until 2026, an outlook largely unchanged from the August forecast round. But there are risks to this outlook - both to the upside and to the downside - and Governor Bullock said the Board needed to gain greater confidence that underlying inflation is on track to return to target before it could consider cutting rates. 

The statement also focused on the strength of the labour market. Although conditions have eased, the RBA continues to assess that the labour market is tight relative to its judgement of full employment. Importantly, the RBA is neither seeking nor thinking that a deterioration in the labour market is needed to return inflation to target. For some time, the RBA has stated its strategy is to gradually bring inflation down in order to preserve the gains in employment achieved through the post-Covid cycle. 

All told, the RBA has retained its relatively hawkish tone compared to its G10 central bank peers currently cutting rates. The RBA is effectively data-dependent, and its messaging will start to shift if either employment or inflation deteriorates unexpectedly. The next RBA meeting is on 9-10 December.  

Preview: RBA November Meeting

Today's RBA meeting (decision due 2:30pm AEDT) appears relatively straightforward, with the Board expected to continue its on-hold stance leaving the cash rate at 4.35% - a setting unchanged since November last year. Markets have done much of the heavy lifting for the RBA ahead of today's meeting; since the September meeting, the 3-year yield has risen more than 50bps to trade above 4% and pricing for a rate cut has been pushed out to May 2025 from a 50/50 prospect in 2024. Key factors have been the hawkish repricing of the Fed outlook, while on the domestic front strong labour market data has been given more weight than slowing inflation in Q3 driven by one-off electricity rebates. This gives the RBA cover to hold its hawkish line of keeping rates 'sufficiently restrictive' while many of its central bank peers overseas continue to cut rates. 

After leaving markets with the sense that policy was calibrated appropriately to balance the risks to its employment and inflation objectives at the conclusion of the September meeting, little is expected from the RBA today. The strength of the domestic labour market has been reaffirmed with employment surging 64.1k in September, holding the unemployment rate to 4.1% as participation lifted to a new record high (67.2%). The Q3 CPI report showed inflation is falling a little ahead of the RBA's forecasts from August; headline inflation slowed from 3.8% to 2.8% and trimmed mean (or core) inflation eased from 3.9% to 3.5%. 

These forecasts will be updated in the quarterly Statement on Monetary Policy that will accompany today's decision, but one inflation report where the declines were driven largely by temporary, volatile factors (electricity rebates and fuel prices) is unlikely to prompt a material revision to the RBA's current outlook for inflation to return to the inflation target 'sustainably' in 2026. For a relevant comparison, the ECB required multiple forecast rounds where inflation surprised to the downside before it was confident enough to start its easing cycle.

Overall, the combination of a robust labour market and inflation still seen some way off from sustainably holding in the target range sets up for the RBA to broadly reaffirm its messaging from September. Expect Governor Bullock in the post-meeting press conference to repeat that rate cuts are not on the radar, with more progress needed on inflation before it can move into an easing cycle. 

Macro (Re)view (1/11) | Yields extend climb

Bonds continued to sell off this week with solid growth and inflation data in the US and euro area combining with a poorly received UK budget to push yields higher. This saw the euro supported against broader US dollar strength, seeing the Australian dollar weaken into next week's presidential election where betting markets still lean towards a Trump victory. The overall backdrop was a headwind to equities, which softened broadly across the US, Europe and Asia.  

US data this week confirmed solid economic momentum and inflation still elevated relative to target, factors that have driven the recent repricing of the Fed's easing cycle. Growth in the US economy expanded by 0.7%q/q in Q3 and 2.7% through the year, bolstered by resilient household consumption (3%Y/Y). Meanwhile, the Fed's preferred inflation gauge - the core PCE deflator - remained at 2.7%yr in September, still somewhat above the Fed's 2% target. Markets largely looked through the October payrolls report - employment rising by just 12k against a low conviction median estimate of 100k -  due to the effects of hurricanes and industrial strikes. An unchanged unemployment rate of 4.1% and the employment cost index moderating from 4.1% to 3.9% year-ended in Q3 - a low since Q4 2021 - were inputs markets saw as consistent with labour market conditions continuing to rebalance from cycle tights. 

Although not to the scale of the 2022 crisis, the UK budget - the first under the new government - became a market event. The details announced by Chancellor Reeves unveiled a high spend-and-tax budget, the independent Office for Budget Responsibility (OBR) estimating the new measures raise the public spend by almost £70bn a year for the next 5 years, spending that is roughly 50% funded by a range of increased taxes. Government debt will be increased to cover the shortfall, rising in the order of £32 per year across the forward projections. The combination of increased gilt issuance - pressing £300bn in 2024/25 and 2025/26 according to the DMO's post-budget remit - and the OBR's assessment that the budget raises the near-term outlook for GDP growth above potential and adds to inflationary pressures saw markets reprice on expectations for a more gradual BoE easing cycle.   

In the euro area, markets were given pause to review their dovish interpretation of the ECB's reaction function. Bets for a 50bps rate cut from the ECB in December were scaled back as Q3 GDP growth and inflation estimates for October surprised to the upside, while the ECB's Schnabel pushed back on aggressive cuts. Economic activity - likely boosted by the Paris Olympics - outperformed modest expectations (0.2%) advancing 0.4% in Q3 (0.9%Y/Y), its strongest quarterly growth in 2 years. October's flash estimates reported headline inflation lifted from 1.7% to 2.0%yr while the core rate held at an unchanged 2.7%yr pace, both measures 10bps above consensus.

Markets look to have already done much of the RBA's work ahead of next week's meeting, pushing pricing for rate cuts well into 2025. While electricity rebates and declining fuel prices have revived Australia's disinflationary process - headline CPI slowed to 0.2% in Q3 lowering the annual pace from 3.8% to 2.8% - core (or trimmed mean) inflation (0.8%q/q) eased more modestly from 3.9% to 3.5% year-on-year, a pace still elevated enough to the 2-3% target band to keep the RBA hawkish to rate cut prospects in the near term. More in-depth analysis of the Q3 CPI report can be found in my review here. In other key developments in Australia this week, household demand remains subdued, though retail volumes picked up (0.5%) in Q3 (see here); dwelling approvals lifted 4.4% in September as house approvals rose to their highest level in 2 years (see here); and housing finance commitments saw their first decline in 8 months easing modestly (-0.3%) in September (see here). 

Australian housing finance -0.3% in September

Australian housing finance commitments saw their first fall in 8 months easing by 0.3% in September, missing the 1% rise expected. Commitments slowed from the prior month (2.1%) as lending to investors fell by 1%; owner-occupier commitments were broadly flat (0.1%). Lending has defied higher interest rates accelerating by almost 19% over the past year as strong demand for housing has run up against supply constraints, driving credit growth (5.1%yr) and housing prices (6.0%yr). The ABS has confirmed today the housing finance series will shift from a monthly to a quarterly frequency, returning in February 2025 covering Q4 2024.

Housing finance commitments posted a month-on-month decline for the first time since January - albeit a very modest one down by 0.3% in September to $30.2bn. Despite higher interest rates reducing borrowing capacity and affordability being pressured by rising housing prices, commitments have risen by 18.9% over the year and are up 28.8% on the cycle low ($23.5bn) seen in February 2023. 

This cycle has been driven by investors, with owner-occupiers playing a supporting role. Despite falling by 1% in September, commitments to investors lifted by 7.1% across the quarter - up 29.5% on 12 months ago. At $11.6bn, monthly lending to investors is just below record highs, with rising housing prices and rents amid very low vacancy rates providing an attractive backdrop. Owner-occupier commitments - largely unchanged in September (0.1%) - saw a 3.2% rise in Q3. Lending to the segment was $18.6bn in the most recent month, up 22.8% on the recent low in July last year.   

Taking a closer look at the owner-occupier segment, the effects of higher interest rates and affordability concerns are visible in parts of the market. The value of construction-related lending was down 2% in the quarter, matched by a 4.7% fall in underlying loan volumes. Meanwhile, first home buyer lending slowed to a 0.4% rise in Q3 - down from an 8.1% acceleration in Q2 - with loan volumes contracting 0.9%q/q. This left upgraders - existing home owners - to drive quarterly growth in owner-occupier lending rising by 4.4% on a 1.6% lift in loan volumes. 

Refinancing has held a broadly flat level since the turn of the year after retracing from the highs of mid-2023 alongside the RBA's hiking cycle. In September, owner-occupiers (3.5%) lifted total refinancing to a 2.1% rise, overcoming a decline (-0.4%) from investors. For Q3, refinancing advanced by 1.5% on gains for both owner-occupiers (1.7%) and investors (1.2%).    

Australian dwelling approvals rise 4.4% in September

Australian dwelling approvals lifted by 4.4% in September, coming in topside on consensus (2.1%) and rebounding from a 3.9% decline in August (revised from -6.1%). House approvals (2.4%) continued to defy the headwinds from higher interest rates, pressing ahead for the 8th month on end to reach their highest level since August 2022. An 8.4% rise from the volatile higher-density segment also contributed to the uplift in approvals.  

Momentum in dwelling approvals continues to extend on strength in the house (or detached) segment. Nationally, approvals lifted by 4.4% in September (14.8k), rising by 6.3% across the quarter to their highest quarterly total (43.9k) since Q4 2022. House approvals advanced 2.4% month-on-month to 9.9k (16.3%yr), levels near the peaks of earlier cycles. In the most recent quarter, house approvals lifted by 4.1% to 29k, a high since Q2 2022. 

In the higher-density segment, approvals increased by 8.4% in September (5k), continuing their volatile month-to-month profile of recent times. For Q3, unit approvals lifted by 10.7% to 14.9k, a level just off cycle lows.   

A couple of key factors are supporting the uptrend in house approvals, despite higher interest rates. Firstly, population growth is driving very strong demand for housing; and secondly, the rate of housing completions has been outpacing new commencements for some time, driving more approvals.  

Strength in house approvals has been broadly based across the nation, though New South Wales has been a notable exception where approvals are down 20.3%yr. The momentum in house approvals at the national level is being driven by Western Australia, the state seeing a 60.2% rise over the past 12 months. South Australia (29.8%) and Queensland (23.8%) have also contributed strongly. 

The 10.7% quarterly rise in higher-density approvals looks to have been driven by the high-rise category, particularly in Melbourne and Brisbane. Low-rise units appear to have played a lesser role, while townhouse developments edged lower in Q3. 

Australian retail sales 0.1% in September; Q3 volumes 0.5%

Australian retail sales slowed to a 0.1% rise in September (vs 0.2% forecast) following a strong gain in August (0.7%). This slowing suggests warm late winter weather supported spending in August rather than the Stage 3 tax cuts or cost-of-living support measures. The August result drove retail sales to a 1% rise across Q3, the strongest quarterly rise since late 2022.    

Growth in underlying retail sales volumes slightly outperformed expectations advancing by 0.5% in Q3 (vs 0.4%) - only the second quarterly increase of the past 2 years - rebounding from a 0.7% decline over the first half of 2024. Nonetheless, retail demand is weak. Growth in headline volumes is just 0.2% over the year, but volumes have contracted sharply by 1.9% in per capita (or population-adjusted) terms. Weakness in demand is taking pricing power away from retailers; growth in retail prices paid by consumers softened to a 0.6% increase in Q3, down from 1% in Q2, with the annual pace of 2.5% now a fraction of the peaks north of 7% seen in the back half of 2022.   

Discretionary-related categories drove the lift in quarterly volumes, rising by 0.9% on a headline ex-food basis. Within this, clothing and footwear (1.9%) and department stores (1.4%) posted the strongest gains, the former seeing its best outturn in more than 2 years. Household goods and 'other' retailing both advanced by 1%. Weakness in Q3 centred in basic food (-0.3%), with dining out also softer (-0.2%) and down sharply through the year (-2.6%).   

Sentiment indicators recently have suggested that the gloom households have felt over the past couple of years is starting to ease. Inflation is coming down - helped by rebates (see here) - the Stage 3 tax cuts are now in play and the labour market remains strong. Based on today's result for retail volumes, consumer demand looks to have remained tepid in Q3; however, these factors set up a more encouraging dynamic into year-end. 

Australian Q3 CPI 0.2%, 2.8%Y/Y

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.