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Q3 CPI shifts cash rate expectations

The quarterly inflation data has sounded alarms among economists, as a hawkish RBA and slowing inflation falls could point towards another rate hike.

The latest data from the Australian Bureau of Statistics has revealed that the Consumer Price Index (CPI) rose 1.2 per cent in the September 2023 quarter and up 5.4 per cent annually. Annual inflation continued its downward trajectory from the 7.8 per cent peak in the December 2022 quarter.

Although this was higher than the 0.8 per cent recorded in the June 2023 quarter that saw annual inflation reach 6 per cent, this rise continued to be lower than those seen in 2022, ABS head of prices statistics Michelle Marquardt said.

The Reserve Bank of Australia’s (RBA) swing to a more hawkish tone in terms of inflation in the October monetary policy minutes and this quarter’s CPI data have shifted cash rate calls from economists.

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ANZ head of economics Adam Boyton stated that the major bank has changed its cash rate call for November, now expecting a cash rate increase of 25 bps to bring the official cash rate to 4.35 per cent.

“We had been highlighting the risk that the Bank could act either late this year or early next, and we now think it more likely than not that risk will be realised,” Mr Boyton said.

“Beyond the November meeting we expect the RBA to return to an extended pause. While 4.35 per cent should mark the peak in the cash rate, there is a risk it could tighten beyond that.

“Any easing remains a very long way off.”

Commonwealth Bank of Australia (CBA) head of Australian economics Gareth Aird and economist Stephan Wu have ascribed a "70 per cent chance to a 25 basis point increase in November", revising it up from the 40 per cent chance recently.

"Headline inflation also came in a little stronger than the market and RBA anticipated," they said.

"But it is the core read that will cause the RBA Board some anxiety."

CBA's economists also noted RBA governor Michele Bullock's recent statement in which she emphasised that the RBA "will not hesitate" to hike rates if there is a "material upward revision to the outlook for inflation".

"We are not sure what constitutes a ‘material upward revision’ to the RBA’s inflation forecasts," they said.

"But we consider the lift in underlying inflation over Q3 23to be sufficiently strong for the RBA to act on their hiking bias at the upcoming board meeting."

CreditorWatch chief economist Anneke Thompson said the inflation data released today (25 October) will give the RBA “cause for concern”, however, will likely question if a higher cash rate will be necessary given the main contributors to the rise.

“In some key categories, such as rents, utilities, insurance and fuel, a cash rate increase will have little to no impact on any future pricing. This will be taken into careful consideration by the central bank,” Ms Thompson said.

According to the ABS, the main drivers to the September quarter rise were automotive fuel (7.2 per cent), rent (2.2 per cent), new dwellings purchased by owner-occupiers (1.3 per cent) and electricity (4.2 per cent).

In annual terms, new dwellings (5.4 per cent), rent (7.6 per cent), electricity (14.5 per cent) and automotive fuel (7.9 per cent) stood as significant contributors.

The rise in rental prices was the largest annual rise recorded since 2009, reflected by low vacancy rates in the midst of a tight rental market across the nation’s capitals.

Trimmed mean inflation returned at 5.2 per cent in the September 2023 quarter, lower than the 5.9 per cent recorded in June 2023 and the 6.8 per cent peak in the December 2022 quarter.

Monthly CPI

The ABS also released the monthly CPI indicator for September, which rose once again to 5.6 per cent in the 12 months to September, with new dwellings (4.9 per cent), automotive fuel (19.7 per cent), rent (7.6 per cent) and tobacco (7.5 per cent) being the main drivers for the month.

The rise in new dwelling prices reflected high labour and material costs, according to the ABS, however, despite the increase from August’s annual movement of 4.8 per cent, the price growth rate has eased since 2022, showing signs of improvements in the supply of materials and subdued new demand.

“This is the second consecutive rise in the annual movement up from 5.2 per cent in August and 4.9 per cent in July,” Ms Marquardt said.

“While many industries price increases are slowing, automotive fuel has had large annual increases in the last two months, which has been driving the movement higher.”

More to come.

[RELATED: Upward pressure on inflation expected]

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