- September quarter inflation was slightly higher than expected at 0.7% quarter on quarter or 1.3% year on year (up from 1% yoy). However, this was driven by sharp price rises for only a handful of items with fruit and vegetables up 11.6%qoq, electricity prices up 5.4%qoq, tobacco prices up 2.3%qoq and property rates and charges up 4%qoq.
- Underlying inflation was actually lower than expected at 0.3%qoq or 1.5%yoy. Deflationary pressures remain significant across a range of areas with clothing prices up only 1.2%yoy, rents up just 0.7%yoy, household appliances up only 1.3%yoy, motor vehicle prices down 1.6%yoy and ongoing weakness in prices for recreation and culture (up 0.6%yoy).
- Both tradeable and non-tradable inflation remain weak at 0.7%yoy and 1.7%yoy respectively.
Implications for the RBA
While it’s a close call, the September quarter inflation result was probably not low enough overall to trigger another rate cut from the RBA at next week’s Board meeting. Both headline and underlying inflation are in line with the RBA’s inflation forecasts and the rise in headline inflation may reduce the short term downside threat to inflation expectations and at the same time economic growth in Australia looks reasonable with the worst of the mining investment slump behind us and a rise in commodity prices set to boost growth in national income. As such, the RBA can afford to be patient in waiting for inflation to head back to target and thereby avoid the risk of adding to financial instability (read a further acceleration in Sydney and Melbourne home price gains) with another rate cut for now.
However, inflation is still very low, it’s not clear that it has bottomed yet and the $A remains uncomfortably high so it’s premature to close the door on another rate cut.
Overall, we think that the RBA will leave rates on hold when it meets again next week, but that another cut (more likely next year) cannot be ruled out.
Originally published by AMP Capital