Headline inflation back in target but underlying price growth remains sticky
Annual headline inflation eased to 2.8% - marking the first time the quarterly measure has fallen into the target band in over three years.
The path to the Reserve Bank’s target band has sharpened into focus. The highly anticipated September quarter Consumer Price Index (CPI) released by the Australian Bureau of Statistics on Wednesday saw prices increase 0.2% in the quarter, with the annual rate of headline inflation easing to 2.8%. This marked the first time the quarterly measure has fallen into the RBA’s target band in more than three years.
As expected, the cooler CPI print has been mainly driven by the introduction of electricity rebates and lower automotive fuel prices. The first instalment of the $300 federal government rebate went to households around the country in July and August, with electricity prices down 17.3% over the September quarter as a result – the largest quarterly fall on record. Excluding these rebates, electricity prices would have been 0.7% higher over the September quarter.
Chart 1: Electricity index (June 2023 quarter = 100)
Source: ABS Consumer Price Index
Interestingly, there were notable differences in CPI movements by capital cities. Brisbane, Perth and Hobart all recorded falls in consumer prices over the quarter, reflecting the impact of different state government policies (particularly state government electricity rebates). For example, the Queensland government’s $1000 electricity rebates (which are additional to the federal rebate) meant that electricity prices were 92.9% lower over the quarter, leading to a 0.9% fall in overall consumer prices.
This quarter there was a substantial divergence between goods inflation (which includes both electricity and automotive fuel) and services inflation. The annual rate of goods inflation was just 1.4%, more than half the previous rate of 3.2% in the year to June. Services inflation on the other hand remains elevated at 4.6% in the year to September, marginally higher than 4.5% in the year to June.
The RBA will be keeping a close eye on services inflation, which will be more difficult to tame as businesses look to pass through higher wage and input costs to consumers. Rents remains a key contributor to services inflation, and would measure even higher were it not for the updated indexation of the Commonwealth Rent Assistance. Even though measures of advertised rents appear to have slowed in recent months, the slow supply side progress on building activity means that rents inflation will remain elevated for some time. Overall services inflation was also pushed up by child care prices, with the July 2023 Child Care Subsidy dropping out of the annual calculation.
Chart 2: Key inflation series, annual rates
Source: ABS Consumer Price Index
While this 2.8% headline CPI read makes for a pretty title, the RBA will be harder to convince. The impact of electricity rebates on inflation is temporary and will do little to address underlying inflationary pressures. The RBA has flagged numerous times now that underlying inflation is going to be the key series they focus on in the coming quarters, to better track the progress of broader disinflation in Australia.
Underlying inflation was 3.5% for the year to September, still outside the RBA’s target band but broadly in line with the RBA’s forecasts in the August Statement on Monetary Policy. However, underlying inflation has eased from 4.0% in the year to June – confirming that the pace of broader inflation is easing, though not quickly enough to pull forward a rate cut to this calendar year.
The RBA faces a tricky road forward. The disinflationary path is starting to feel more tangible, though there are risks that underlying inflation may remain stubborn if services inflation stays elevated. The RBA will also be closely tracking other key data releases – like labour market data and consumer spending data – before commencing the easing cycle in 2025.
This newsletter was distributed on 31st October 2024. For any questions/comments on this week's newsletter, please contact our authors:
This blog was co-authored by Michelle Shi, Senior Economist at Deloitte Access Economics
Click on the links below to read our previous Weekly Economic Briefings:
- Deloitte Access Economics Business Outlook: Supply stumbles (23 Oct)
- China risks a protracted slowdown without significant stimulus (17 Oct)
- Housing market: lots of pain, not much gain (09 Oct)
- Retail Holiday Report: Charting a course for growth (01 Oct)
