In the third quarter of 2023, Australian consumer price inflation reached its lowest level in three and a half years, although core inflation remained stubbornly elevated, suggesting that significant reductions in interest rates from the Reserve Bank of Australia (RBA) are still unlikely until next year. The inflation report revealed contrasting trends, where consumers enjoyed some relief from government subsidies on electricity and a notable decrease in petrol prices. This mix of outcomes contributed to a muted market response, with the Australian dollar experiencing a slight uptick and bond futures displaying minimal movement. Investors adjusted their expectations, reducing the likelihood of a rate cut in December and February, while indicating that April 2024 seems to be the favored timeline for initial easing measures.
Data from the Australian Bureau of Statistics (ABS) indicated that the consumer price index (CPI) rose by a modest 0.2% in the third quarter, which fell short of the anticipated 0.3% increase. Annually, inflation decreased from 3.8% to 2.8%, bringing it comfortably within the RBA’s target range of 2-3% for the first time since 2021. The primary driver behind this slowdown was a dramatic 17.3% decline in electricity prices due to governmental subsidies, alongside a 6.2% drop in petrol prices. Nevertheless, the core inflation rate, which captures underlying price movements, increased by 0.8% for the quarter, slightly surpassing the forecasted 0.7% rise, while the annualized rate slowed to 3.5% down from 4.0%.
Concerns linger, particularly from the RBA’s perspective, regarding persistent price pressures in specific service sectors. The annual services inflation was recorded at 4.6%, showing minimal movement from the previous quarter, suggesting sustained upward pressure on prices within areas such as rents, insurance, and medical services. Industry experts, including Stephen Smith from Deloitte Access Economics, noted that these issues predominantly arise from supply-side constraints rather than demand-driven inflation, thus implying that further interest rate hikes are unlikely to alleviate existing pricing pressures. The central bank remains focused on these persistent challenges as it prepares for its next policy evaluation meeting.
In September alone, CPI showed a year-on-year rise of merely 2.1%, the lowest since July 2021, confirming the broader trend of moderating inflation. In terms of core inflation, the trimmed mean measure slowed down to 3.2%, which is slightly above the RBA’s target range. The RBA has maintained its policy stance since November 2022, indicating that the current cash rate of 4.35% – a steep rise from the pandemic low of 0.1% – has been adequate to curtail inflation while supporting job retention and economic stability. The robust performance of the labor market also serves as an argument against any immediate actions towards cutting interest rates.
Despite the positive developments in inflation data, the easing of annual core inflation comes with caution, given that the RBA had previously projected it would taper down to 3.5% by year-end. Abhijit Surya, an economist at Capital Economics, highlighted that while the trimmed mean CPI has not yet reached a growth rate consistent with the RBA’s target range, an acceleration in inflation is anticipated in the near term. This expectation could set the foundation for the central bank to consider initiating easing measures during its policy meeting in February next year, thereby aligning with broader market anticipations.
Overall, the mixed nature of the inflation report portrays a nuanced economic landscape for Australia, characterized by an ongoing struggle between easing price pressures in some sectors and persistent inflation in others. As the RBA reviews its monetary policy approach, it must navigate the complexities of supply-side constraints affecting services and the delicate balance between fostering economic growth and managing inflationary expectations. With consumer trends shifting aided by government interventions, and the resilience of the labor market persisting, the central bank faces critical decisions that could impact financial conditions in the upcoming months.