Inflation movements spark cash rate speculation

New data released from the Australian Bureau of Statistics has shown the consumer price index (CPI) rose by 0.8 per cent in the September quarter, to be 3 per cent higher over the year.

However, the Reserve Bank of Australia’s (RBA) preferred measure of underlying inflation, the trimmed mean (which excludes extreme price rises and falls), rose by 0.7 per cent in the quarter to be 2.1 per cent higher over the year – up from 1.6 per cent in the June quarter.

This has placed annual underlying inflation within the RBA’s target range of 2 to 3 per cent, which the central bank aimed to hit before raising the cash rate from its current historic low of 0.1 per cent.

The RBA recently indicated that it would not shift the target range, despite acknowledging the effect of the cash rate on property prices.

But it has not expected inflation to remain sustainably within the 2 to 3 per cent bracket until 2024.

AMP Capital chief economist Shane Oliver and senior economist Diana Mousina have however tipped that a rate rise may be on the cards for November next year, noting the September quarter inflation data was stronger than the Reserve Bank forecast in August.

“The RBA won’t rush into a rate hike because it wants to see that ‘inflation is sustainably within the target range’ and for this to occur it will want to see more evidence that the inflation pick up is moving beyond transitory distortions due to the pandemic,” Dr Oliver wrote in an analysis on Wednesday (27 October).

“And it will want to see a tighter labour market with full employment and wages growth around 3 per cent or more before hiking rates.

“However, with the economy now recovering again we believe that the conditions for the start of rate hikes will now be in place by late 2022 so we are now pencilling in a small increase in the cash rate from 0.1 per cent to 0.25 per cent in November next year and a 0.25 per cent in November next year and a 0.25 per cent hike in December 2022, taking the cash rate to 0.5 per cent by the end of next year.”

While an increased cash rate will translate into higher consumer and housing interest rates, the overall rate level will still be low and far from “tight” monetary conditions, the two economists stated.

The most significant price rises the ABS had tracked during the September quarter were new dwellings (up 3.3 per cent) and automotive fuel (up 7.1 per cent).

“Construction input costs such as timber increased due to supply disruptions and shortages. Combined with high levels of building activity, this saw price increases passed through to consumers,” ABS head of price statistics Michelle Marquardt commented.

“Rising fuel prices also contributed to the September quarter CPI increase, with the CPI’s automotive fuel series reaching the highest level in its half-century history.”

Rents had also risen by 0.2 per cent, with rises in cities partially offset by falls across Sydney and Melbourne.

“A two-speed rental economy remained evident in the September quarter,” Ms Marquardt said.

“Low vacancy rates drove price rises in Brisbane, Adelaide, Perth, Hobart, Darwin and Canberra, while high vacancy rates, particularly for inner city properties, saw rental prices fall in Sydney and Melbourne on both a quarterly and annual basis.”

Many of the consumer categories had experienced price rises due to COVID-related disruptions, with higher energy prices filtering into producer and consumer costs and manufacturing bottlenecks in production and shipping.

The analysis from the AMP Capital economists noted most of the factors are likely to be temporary and are expected to fade as economies reopen and consumer spending rebounds from goods to services – relieving pressure from goods inflation.

[Related: Sydney’s housing affordability could hit lowest in a decade: Moody’s]