Upward pressure on inflation expected

Economic headwinds, such as the Gaza war and the ongoing conflict in Ukraine, are expected to have an impact on the Australian Bureau of Statistics (ABS) September quarterly consumer price index (CPI) figures, set to be released on Wednesday, 25 October.

While the annual inflation rate for the June quarter reached 6 per cent, indicating “signs of moderation”, Minister for Finance Katy Gallagher stated that higher petrol prices are expected to “play a more significant role” in this quarter.

“We do expect that we’ll see upward pressure on inflation,” Ms Gallagher said.

“There’s no doubt inflation is moderating … but it’s staying higher than we’d like for longer than we’d like.”

The quarterly inflationary data is anticipated to be a crucial factor in the Reserve Bank of Australia’s (RBA) upcoming monetary policy meeting on 7 November.

The RBA’s October minutes have expressed “a low tolerance for a slower return of inflation to target than currently expected” and future interest rate adjustments will depend on incoming data, particularly the third-quarter Consumer Price Index (CPI) data.

The RBA maintained the cash rate at 4.1 per cent in October, following three consecutive pauses.

In her first cash rate decision in October, incoming RBA governor Michele Bullock mentioned: “Some further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable time frame, but that will continue to depend upon the data and the evolving assessment of risks.”

The latest monthly data for August revealed that fuel prices were the primary contributor to higher-than-expected monthly inflation, which rose from 4.9 per cent the previous month to 5.2 per cent.

Despite global uncertainty and various pressures, major bank economists anticipate a reduction in inflation from the previous quarter.

The Commonwealth Bank’s Stephen Wu expects a 1.4 per cent decline in households’ contents and services, resulting in a quarterly inflation rate of 5.1 per cent annually.

Similarly, Westpac and the National Australia Bank expect inflation to increase to 5.3 per cent, while ANZ predicts a 5.4 per cent increase.

Another economic indicator the Reserve Bank will turn to next month is the latest unemployment rate, which remained steady at 3.7 per cent in August.

The number of people employed increased by 64,900 workers, bringing the total labour force size to 14,107,900.

The combination of a positive unemployment rate and higher-than-expected inflation could potentially prompt the Reserve Bank to consider another cash rate hike for borrowers before the year’s end.

However, most of the major banks’ economists continue to express optimism that the peak cash rate will remain at 4.1 per cent, with NAB remaining the outlier, expecting another increase in November or December.

In addition, the CBA has now assigned a 40 per cent probability of another increase occurring this year as the inflation outlook weakens.

[Related: August CPI fulfills market expectations]