Today’s monthly CPI results reveal annual headline inflation of 2.1% – below market expectations and continuing to hover around the lower bound of the RBA target range. But hopes of an early rate cut next year are fading, given that both the seasonally-adjusted headline rate and, importantly the trimmed mean inflation rate lifted over the month.
There are a number of standouts in the data that suggest there is likely to be a stickiness in core inflation. In particular rents inflation remains elevated for the month at an annualised level of 6.7% – which, given this component has the highest weighting of all the categories making up the inflation basket, means its influence is likely to be felt strongly for some time to come.
Today’s numbers also include the impact of the recent school holidays which spilled over into the first week of October pushing up the domestic holiday costs this year compared to 2023 when the 3rd term break was broadly over by the end of September.
It is important to recognise the inherent limitations with the monthly inflation series, with only around 66% of the price indices updated in the methodology applied for month 1, which includes October’s calculation. KPMG’s analysis of the monthly data does suggest there is a slight upwards bias in month 1 results relative to months 2 and 3, and therefore today’s results may slightly overstate the true picture with respect to current levels of inflation.
But today’s inflation numbers are unlikely to cause a change in stance at the RBA with respect to when to start reducing Australia’s cash rate. Michelle Bullock has consistently noted that quarterly CPI data is more important to its decision-making process, and recent comments by the Governor reiterate the perspective that the RBA wanted to see 2 successive quarters of low inflation before it would start to consider implanting an easing in monetary policy. The next quarterly CPI data will not be released until late January 2025 – in time for the February 2025 board meeting – and so much hinges on how those numbers land.
While there are still some arguments for easing the cash rate from February 2025 – the most obvious being the weak state of the economy, with both business investment and household consumption low – it seems the continuation of high government spending, elevated population growth, limited increases in the stock of dwellings and tightness in the labour market (due to strong public sector employment), will all combine to see the first rate cut of 2025 pushed back to around mid-year.
Details
- Today’s release of the monthly CPI indicator shows y/y inflation in October 2024 has remained at 2.1%, below the consensus forecast of 2.3%. This continues to be the lowest annual inflation rate since July 2021.
- Compared to the 3.5% figure recorded in July 2024, this indicates that price pressures have continued to subside in the past three months.
- However, annual trimmed mean inflation has risen to 3.5% from 3.2% in the previous month – albeit still lower than the 3.8% recorded three months ago in July. When excluding volatile items and holiday travel, the CPI fell to 2.4% y/y in October, from 2.7% in September.
- The main contributors to inflation were Food and non-alcoholic beverages (+3.3%), Recreation and culture (+4.3%), and Alcohol and tobacco (+6.0%).
- Significant falls in the price of Electricity (-35.6%) and Automotive fuel (-11.5%) in the past 12 months have had a major impact on the annual inflation measure. This was the largest annual decrease in the price of electricity ever recorded in the CPI, due to Commonwealth and State government rebates. Electricity prices fell by 12.3% in the month of October alone, and helped to offset higher rents and new dwelling prices in the ‘Housing’ group.
- Rents rose by 6.7% annually, and this was in the context of an increase in Commonwealth Rent Assistance (CRA), which rose by 10% in September 2024 in addition to the usual CPI indexation (which occurs in March and September). Without the increase in CRA, rents would have risen by 8.1%.
- Growth in new dwelling prices has slowed, rising 4.2% in the 12 months to October, due to lower demand. This is the lowest annual rate since August 2021.
- While annual inflation for food and non-alcoholic beverages held steady at 3.3%, lower supply has driven the price of fruit and vegetables up by 8.5% in the 12 months to October.
- Note that this is also the first inflation release where the ABS has applied a correction to the measurement of out-of-pocket childcare costs. This means that the rise in annual CPI inflation was 0.05% lower than it would have otherwise been.
For further information
Ian Welch
KPMG Communications
0400 818 891
iwelch@kpmg.com.au