Despite headline CPI returning to the target range, the RBA is unlikely to respond with rate cuts for some time.
Australian CPI inflation slowed from +1.0% in the June quarter to +0.2% in the September quarter, according to ABS figures. This was below the consensus forecasts of a +0.3% increase.
The annual rise slowed from +3.8% in Q2 to +2.8%, also below the +2.9% consensus estimate.
Trimmed mean core inflation slowed from +3.9% yoy to +3.5%, in line with expectations.
Michelle Marquardt, ABS head of prices statistics, said: "The September quarter’s rise of 0.2 per cent is the lowest outcome since the June 2020 quarter fall which occurred during the COVID-19 outbreak and was driven by free childcare. Annually, the September quarter’s rise [was] the lowest annual inflation rate since the March 2021 quarter.”
The most significant contributors to the quarterly rise were Recreation and culture (+1.3%) and Food and non-alcoholic beverages (+0.6%).
Prices continued to rise for most goods and services. But these increases were offset by large falls in Electricity (-17.3%) and Automotive fuel prices (-6.7%).
“The 2024-25 Commonwealth Energy Bill Relief Fund rebates in all states and territories and state government electricity rebates in Queensland, Western Australia and Tasmania led to a large fall in electricity prices this quarter. Without the rebates, electricity prices would have increased 0.7 per cent this quarter,” Ms Marquardt said.
Annual Goods inflation was +1.4%, driven by price rises for new dwellings and tobacco, while service prices rose by +4.6%, up from +4.5% in Q2.
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Fin-X Wealth View
The lower inflation readings will be a pleasing step in the right direction for the RBA, but even though the headline figure is now within the 2%-3% range, it won't be enough to spur the Board into an early rate cut. The Reserve Bank has explicitly said that is will look past the short-term impact of subsidies and focus on when CPI inflation will sustainably return to target.
Moreover, the Governor has previously stated that "homegrown" inflation stemming from a tight labour market is a concern. In this regard, the acceleration in services inflation to +4.6% is an unwelcome development. Market pricing continues to suggest that the first rate cut won't materialise until February at the earliest.
The Board is, therefore, unlikely to make any changes next week and the highlight will most likely be the updated November forecasts which address the longer-term outlook for prices and policy. However, the market will be paying close attention to see if the Governor's language changes from "not ruling anything in or out" to a firmer signal that rates may have reached their peak, which could support bond prices.
From a growth perspective, there is some evidence in surveys that the combined effects of tax cuts and subsidies have provided a short-term boost in activity. It remains to be seen whether this will be sustained with interest rate cuts taking longer to materialise. We also suspect that global conditions will present a stronger headwind in 2025.
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