Wednesday’s CPI report has shifted the outlook for interest rate cuts into 2025, highlighting ongoing concerns over core inflation that remains stubbornly above the Reserve Bank’s target.
Australia’s latest Consumer Price Index print has seen inflation drop to 2.8 per cent over the past 12 months to September, bolstered by temporary government subsidies, but core inflation remains above the Reserve Bank target.
Annual trimmed mean inflation remained at 3.5 per cent, which places the RBA in a cautious stance on rate cuts.
Gareth Aird, from the Commonwealth Bank of Australia (CBA), previously the most optimistic of the economists, said that while the September quarter CPI indicates continued disinflation, it has not progressed at the pace anticipated on an underlying basis.
“The upshot is that we no longer expect the RBA to cut the cash rate in December 2024. Instead, we pencil in February 2025 for a 25 bp rate decrease,” Aird said.
The CBA’s previous forecast for a December cut was contingent upon a 3Q24 CPI trimmed mean outcome of 0.7 per cent or less; the current data has prompted the bank to revise this expectation.
Similarly, Andrew Canobi, director at Franklin Templeton Fixed Income, said this inflation print is a sign that a 2024 rate cut is unlikely, as core inflation and a strong labour market point to continued resilience.
“The inflation number all but kills whatever glimmer of hope remained of a 2024 rate cut. The headline is artificially low through electricity subsidies of course,” Canobi said.
“Underlying trimmed mean at 0.8 per cent for Q3 24 and 3.5 per cent year-on-year is what matters and, while inching closer to target, isn’t close enough to the 2–3 per cent target. Services inflation was actually a bit stronger at 4.6 per cent year-on-year.
“The still solid labour market is also telling the RBA there’s no reason to rush into a rate cut.”
State Street Global Advisors APAC economist Krishna Bhimavarapu said that while the trimmed mean CPI drop aligns with easing high-frequency indicators, the RBA could benefit from a dovish pivot to avoid prolonged below par growth.
“Although headline CPI eased as expected on energy subsidies, there were a lot of positive takeaways in the data,” Bhimavarapu said.
“Trimmed mean inflation eased half a percentage point to 3.5 per cent y/y, in line with high frequency indicators and should ideally help the RBA make a dovish pivot. Delaying such a pivot might get the economy socked with prolonged below par growth rate.”
Still, State Street Global Markets’ Dwyfor Evans said that underlying price pressures in healthcare, recreation, food, and insurance indicate stubborn inflationary trends, leading him to project early 2025 as a more realistic time frame for any RBA rate cuts.
“Consensus expectations on Q3 disinflation cannot mask concerns that online price pressures in Australia remain persistently high relative to the RBA’s 2–3 per cent target,” Evans said.
“A cautious RBA may again indicate early 2025 for rate easing when it meets and releases its monetary policy statement on 5 November.”
On the flipside, Saxo Asia-Pacific chief investment strategist, Charu Chanana, said that the Q3 CPI print was just right to support the RBA’s stance – neither too cool to prompt earlier rate cuts nor too hot to provide further pushback to RBA rate cut expectations.
“A rate cut from the RBA still remains likely in December if the US Fed’s cuts are more aggressive, or if the Australian consumer weakens faster than expected. Tariff risks from a likely Republican ‘Red Sweep’ in the US election next week, and the lack of efficacy of China’s stimulus measures could continue to be critical headwinds for AUD as it trades near three-month lows,” Chanana said.
Key inflation components
The CPI data released on Wednesday largely met market expectations, with the September quarter 2024 CPI below market expectations on the headline measure. However, the trimmed mean CPI aligned with the market’s median forecast.
The headline CPI rose by 0.2 per cent on the quarter and the annual rate dipped to 2.8 per cent. In trimmed mean terms, CPI increased by 0.8 per cent on the quarter and the annual rate eased to 3.5 per cent.
The large gap between the quarterly change in the headline and trimmed mean CPI reflected a big 17.3 per cent decline in electricity prices due to federal and state government energy rebates. Moreover, automotive fuel prices fell by 6.7 per cent.
The most significant contributors to the quarterly rise of 0.2 per cent were recreation and culture (+1.3 per cent) and food and non-alcoholic beverages (+0.6 per cent), the former being driven by both international and domestic holiday travel and accommodation.
The RBA is due to deliver its next rate decision on 5 November.
