Australian consumer price inflation slowed to a 3.5-year low in the third quarter, although core inflation remained persistent, reinforcing expectations that the Reserve Bank of Australia (RBA) is unlikely to initiate interest rate cuts until next year.
The mixed inflation report showed consumers benefiting from government rebates on electricity and a decline in petrol prices, while service-related price pressures continued. The Australian dollar edged up 0.1% to $0.6569, and three-year bond futures dipped slightly to 96.06.
Market expectations for a December or February rate cut from the RBA were slightly reduced to 26% and 42%, respectively, with April 2024 now seen as the most probable timeframe for the first easing.
Data from the Australian Bureau of Statistics revealed that the consumer price index (CPI) rose by 0.2% in the third quarter, falling short of forecasts for a 0.3% increase. Annual inflation dropped to 2.8%, down from 3.8%, marking the first return to the RBA’s target band of 2-3% since 2021—a result widely anticipated.
The slowdown was primarily driven by a 17.3% decrease in electricity prices due to government subsidies, coupled with a 6.2% drop in petrol prices for the quarter.
Policymakers remain focused on core inflation, where the trimmed mean measure increased by 0.8%, just above the forecast of 0.7%. However, the annual pace of core inflation eased to 3.5% from 4.0%.
“The ABS data indicates that persistent price pressures in areas like rents, insurance premiums, and medical services are largely supply-side issues,” noted Stephen Smith, a partner at Deloitte Access Economics. “These cannot be mitigated by further cash rate hikes, supporting our view that the existing rate increases have effectively curbed demand-led inflation.”
Services inflation remains a concern for the RBA, staying elevated at 4.6% in the third quarter, slightly up from 4.5% in June and relatively stable over the past year.
The central bank will update its economic forecasts when it convenes for its next policy decision on Tuesday. The easing inflation has prompted warnings from Australian grocer Woolworths about potential declines in earnings from its food division as price-sensitive consumers seek out bargains.
For September alone, CPI rose by a modest 2.1% year-on-year, the lowest figure since July 2021. The trimmed mean measure also slowed to 3.2%, just above the upper limit of the RBA’s target band.
The RBA has maintained its cash rate at 4.35% since November, viewing this level—up from 0.1% during the pandemic—as sufficiently restrictive to bring inflation within target while preserving employment gains. The labor market has remained surprisingly resilient, making a case against early rate cuts.
Despite the easing in annual core inflation, the RBA projects it will slow to 3.5% by year-end. “While the quarterly trimmed mean CPI isn’t yet rising at a rate aligned with the RBA’s target range, we anticipate it will do so soon,” said Abhijit Surya, Australia and New Zealand Economist at Capital Economics. “This should set the stage for the Bank to consider policy easing at its meeting next February.”
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