Australia’s latest consumer price index saw inflation fall to 2.8 percent in the 12 months to September, supported by temporary government subsidies, but core inflation remains above the objective of the Reserve Bank.
Reduced annual average inflation remained at 3.5 per cent, putting the RBA in a cautious position on rate cuts.
Gareth Aird of the Commonwealth Bank of Australia (CBA), previously the most optimistic of economists, acknowledged that although the September quarter CPI indicated continued disinflation, it did not grow at the pace expected on an under-performing basis. underlying.
“The result is that we no longer expect the RBA to cut the policy rate in December 2024. Instead, we expect the rate to cut by 25 basis points in February 2025,” Aird said.
The ABC’s previous forecast for a reduction for December was dependent on a reduced average CPI reading in Q3 24 of 0.7 percent or less; current data has prompted the bank to revise this expectation.
Similarly, Andrew Canobi, director of Franklin Templeton Fixed Income, said this inflation number is a sign that a rate cut in 2024 is unlikely, as underlying inflation and a strong labor market leave portend continued resilience.
“The inflation number virtually kills the remaining glimmer of hope of a rate cut in 2024. The number is artificially low, of course thanks to electricity subsidies,” Canobi said.
“What matters is the underlying average truncated to 0.8 percent for Q3 24 and 3.5 percent year-on-year and, although close to the target, it is not not close enough to the 2 to 3 percent target. Services inflation was actually a little higher, at 4.6 percent year-on-year.
“The still strong labor market also indicates to the RBA that there is no reason to rush into a rate cut.”
Krishna Bhimavarapu, APAC economist at State Street Global Advisors, argued that even if the average CPI decline aligns with the easing of high-frequency indicators, the RBA could benefit from an accommodative pivot to avoid prolonged growth below normal.
“Although the overall CPI fell as expected thanks to energy subsidies, the data contains many positive lessons,” Bhimavarapu said.
“Reduced average inflation fell by half a percentage point to 3.5% year-on-year, in line with high-frequency indicators and should ideally help the RBA make a dovish turn. Delaying such a pivot could plunge the economy into a prolonged below-normal growth rate.
Nonetheless, State Street Global Markets’ Dwyfor Evans warned that underlying pricing pressures in health care, entertainment, food and insurance point to stubborn inflationary trends, leading him to to project early 2025 as a more realistic timetable for any RBA rate cuts.
“Consensus expectations of third-quarter disinflation cannot mask concerns that online price pressures in Australia remain persistently elevated relative to the RBA’s 2-3 per cent target,” Evans said.
“A cautious RBA could again indicate rate easing in early 2025 when it meets and publishes its monetary policy statement on November 5.”
On the other hand, Charu Chanana, Saxo Asia Pacific chief investment strategist, believed that the third quarter CPI figures were fair to support the RBA’s stance – neither too calm to cause declines in previous rates, nor too hot to further push back the RBA’s rate cut expectations.
“An RBA rate cut remains likely in December if Fed cuts are more aggressive or the Australian consumer weakens faster than expected… Tariff risks linked to a likely Republican ‘red sweep’ in the election next week, and the lack of effectiveness of China’s stimulus measures could continue to pose a major headwind for the AUD as it trades near a three-month low,” said Chanana.
Key Components of Inflation
CPI data released on Wednesday largely met market expectations, with the September 2024 quarter CPI falling short of market expectations on the overall measure. However, the reduced average CPI aligns with the median market forecast.
The headline CPI rose 0.2 percent over the quarter and the annual rate fell to 2.8 percent. In reduced average terms, the CPI rose 0.8 percent over the quarter and the annual rate fell to 3.5 percent.
The large gap between the quarterly change in the overall CPI and the reduced average CPI reflects a sharp 17.3 percent decline in electricity prices due to federal and state energy rebates. Additionally, auto fuel prices fell 6.7 percent.
The main contributors to the quarterly increase of 0.2 percent were leisure and culture (+1.3 percent) as well as food and non-alcoholic beverages (+0.6 percent), the former being driven by travel and accommodation for holidays abroad and domestically.
The RBA is expected to make its next rate decision on November 5.
