Rising inflation in Australia supports tight RBA policy stance – BNN Bloomberg

(Bloomberg) — Australia’s core inflation remained elevated last quarter, reinforcing the Reserve Bank’s view that price pressures will take time to dissipate and that monetary policy must remain accommodative for now.

The stripped average measure of consumer prices, which smooths out volatile items, rose 0.8 percent in the three months to September, according to estimates, Australian Bureau of Statistics data showed on Wednesday. On an annual basis, the diluted average rose 3.5%, also in line with forecasts. The RBA focuses on core CPI as government subsidies suppress core prices.

Currency- and policy-sensitive three-year government bonds were little changed after the release.

The figures are broadly in line with the RBA’s inflation outlook. Governor Michele Bullock said in the bank’s annual report released last week that she expected it would take “a year or two” before consumer prices could sustainably return to the 2-3 percent target. The RBA will publish a new round of economic forecasts along with its policy decision on Tuesday.

The result “should reinforce the RBA’s existing view that inflation will not be sustainable within the target range for some time yet, suggesting limited changes to its quarterly forecasts next week,” said Sean Callow, senior FX analyst at In-Touch Capital Markets.

The slow pace of disinflation reflects Australia’s lower interest rate peak relative to international peers as the RBA worries about the ability of heavily indebted households to meet significantly higher mortgage repayments. The central bank has held its key rate at a 12-year high of 4.35% since last November and most economists do not expect a cut before February 2025.

RBA policymakers said they were mindful of upside risks to prices from potential higher consumer spending following the government’s income tax cuts that began in July, as well as global geopolitical and trade tensions. They have repeatedly said that aggregate demand still exceeds the supply capacity of the economy.

It is not yet clear whether households are saving or spending the extra money, but if they are consuming, then economists fear that inflation’s return to target could be even slower than expected. Thursday’s retail sales data will provide some guidance on demand in the economy.

The government also provided energy subsidies to help reduce inflation. Headline CPI fell to 2.8 percent in the third quarter from a year earlier, below estimates for a 2.9 percent increase, the report said.

What Bloomberg Economics Says…

“The RBA will likely be cautiously pleased with third-quarter CPI, but the relative outpacing of consensus will not be enough on its own to tip the central bank to cut rates at its November 4-5 meeting.”

— James McIntyre, economist

For the full note, click here

Wednesday’s data follows a strong jobs report earlier this month and highlights the RBA’s progress in maintaining post-pandemic job gains, another reason it has not taken the cash rate as high as the global benchmark .

“While today’s numbers are a step in the right direction, concerns about the persistent tightening of the labor market give the RBA every reason to keep the status quo at 4.35%,” said Devika Shivadekar, economist at consultancy RSM Australia .

Wednesday’s inflation report also showed:

Annual services inflation was 4.6% in the third quarter, slightly higher than in the previous period, and has remained around 4.5% over the past 12 months, the ABS said. Rent, insurance, education and medical services drove the gains
Prices of non-tradables, which are largely affected by domestic variables such as utilities and rents, rose 4.1% annually
Tradable prices, which are typically affected by currency and global factors, rose 0.6%

–With help from Michael G. Wilson.

(Adds more details and comments from analysts.)