Australian consumer price inflation reached a 3-1/2 year low in the third quarter, although the core inflation measure remained persistently high, suggesting that the central bank may not reduce rates until the following year. Despite mixed outcomes, consumers benefited from government rebates on electricity and a decline in petrol prices, while price pressures for services persisted.
The market response was subdued, with investors slightly reducing the probability of the Reserve Bank of Australia (RBA) cutting rates in December and February to 24% and 44%, respectively. April of the following year is still viewed as the most likely time for the initial easing of rates.
According to data released by the Australian Bureau of Statistics, the consumer price index (CPI) increased by 0.2% in the third quarter, below expectations of a 0.3% rise. On an annual basis, inflation dropped to 2.8% from 3.8%, bringing it back within the RBA’s target band of 2-3% for the first time since 2021, a result that was largely anticipated.
This slowdown in inflation was led by a 17.3% decrease in electricity prices due to government subsidies, and petrol prices fell by 6.2% during the quarter. Policymakers are focusing on core inflation, and the trimmed mean measure rose by 0.8% during the quarter, slightly exceeding forecasts of a 0.7% increase, although the annual pace slowed to 3.5% from 4.0%.
The Commonwealth Bank of Australia retracted its prediction of a rate cut in December, as the core measure was somewhat higher than expected. It now anticipates a rate cut in February, aligning with predictions from Australia’s other three major banks. Gareth Aird, head of Australian economics at CBA, suggested that the normalization of the cash rate may unfold in 2025.
Services inflation remains a significant concern for the RBA, remaining high at 4.6% in the third quarter, slightly above the June quarter’s 4.5%, and largely unchanged over the past year. The central bank will present an updated set of economic forecasts during its next policy decision on Tuesday.
The slow decline in inflation prompted Australian grocer Woolworths to caution that earnings from its food division could decrease as consumers increasingly seek bargains.
In September alone, the CPI rose by a modest 2.1% from the previous year, marking the lowest increase since July 2021. The trimmed mean measure decelerated to 3.2%, slightly higher than the top of the target band.
The RBA has maintained its policy stance since November, with the current cash rate set at 4.35%, up from 0.1% during the pandemic, believing it to be sufficiently restrictive to achieve the inflation target of 2-3% while maintaining employment gains. The labor market remains unexpectedly resilient, countering arguments for early rate cuts, though the deceleration in annual core inflation is ahead of the RBA’s forecast of 3.5% by year-end.
Abhijit Surya, an economist for Australia and New Zealand at Capital Economics, noted that although the quarterly trimmed mean CPI has not yet reached a pace consistent with the RBA’s target range, it is expected to do so shortly, paving the way for potential policy easing in February.