Some economic numbers mean more than others and that was the case with the Q3 CPI data. The RBA had recently made it clear that it was getting uncomfortable that inflation might stay too high for too long. The essence of the message was that if inflation continued to decline in line (or below) the RBA’s forecasts then the cash rate may have peaked. But if inflation surprised notably on the high side then another rate hike was likely. The September quarter CPI data surprised on the high side.
November 17, 2023
Some economic numbers mean more than others and that was the case with the Q3 CPI data. The RBA had recently made it clear that it was getting uncomfortable that inflation might stay too high for too long. The essence of the message was that if inflation continued to decline in line (or below) the RBA’s forecasts then the cash rate may have peaked. But if inflation surprised notably on the high side then another rate hike was likely. The September quarter CPI data surprised on the high side.
The headline CPI rose by 1.2% in the September quarter (5.4% over the year). The RBA also likes to look at alternative gauges of inflation. It’s favourite measure of ‘underlying’ inflation is the Trimmed Mean, which also rose 1.2% in the quarter (up 5.2% over the year).
It was not all bad news. The growth in goods prices (removing the volatile items) continues to slow and services inflation might have started to fall. Tradeable goods continues to decline in line with ongoing improvement in global supply-chain problems. on-tradeable goods and service inflation appears to have peaked. All of this suggests that further slowing in the inflation rate in coming quarters is likely.
Mainly the rise and fall that has taken place in inflation has been due to global factors (COVID, Russia-Ukraine War). Movements in Australian inflation largely mirror that of peer countries (such as Canada and New Zealand). The data overseas is also consistent with a further moderation of inflation in coming quarters.
The economy has slowed, mainly because of a step-down in consumer spending. This has led to some rise in the unemployment rate and some decline in capacity utilisation. But the level of both suggests that there is still little spare capacity in the Australian economy.
There has been improvement in supply-chain problems in Australia, however this improvement has not been as marked as what has happened globally. The domestic rate of improvement in supply-chain problems as reported by firms has slowed over the past couple of quarters. There has been a big increase in the number of workers and a modest decline in the demand for workers. Nonetheless, a shortage of workers remains many firms’ greatest problem. And that is likely to remain the case for at least another six months.
Firms’ cost growth has remained elevated and has meant that many businesses have had to pass on decent price rises to their customers. Inflation having been above the RBA’s 2-3% target for 10 quarters has led to consumer inflation expectations stabilising at a level inconsistent with price growth returning to the RBA’s target. And the extended period of high inflation has led to financial market medium-term inflation expectations rising to their highest level in around 10 years.
All of this suggests that another rate hike is imminent, particularly given that Australia’s cash rate is about one percentage point below that of peer countries. We will soon find out whether RBA views about the inflation outlook have changed post the Q3 data.
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