September "underlying" CPI surprises; market expects rate rises sooner

Summary: Annual Inflation rate slows to 3.0% in September quarter, in line with market expectations; RBA preferred measure rises to 2.1%, above expected figure; housing, transport costs main drivers of result.

In the early 1990s, high rates of inflation in Australia were reined in by the “recession we had to have” as it became known. Since then, underlying consumer price inflation has averaged around 2.5%, in line with the midpoint of the RBA’s target range. Following the GFC, various measures of consumer inflation had been in a down-trend despite attempts by the RBA to increase them through historically low cash rates.

Consumer price indices for the September quarter have now been released by the ABS and the seasonally-adjusted inflation rate posted a 0.8% rise. The increase was in line with the generally expected figure, as well as June’s comparable figure. On a 12-month basis, the seasonally-adjusted rate slowed from 3.7% after revisions in June to 3.0% as the 1.8% drop in the June 2020 quarter fell out of the calculations.

The RBA’s preferred measure of underlying inflation, the “trimmed mean”, increased by 0.7% over the quarter, above market expectations of a 0.5% increase and the June quarter’s 0.5% rise. The 12-month growth rate rose from 1.6% to 2.1%.

Shorter-term Commonwealth Government bond yields jumped on the day while longer-term yields reacted in a more subdued fashion or even declined. By the close of business, the 3-year ACGB yield had increased by 12bps to 1.14% while the 10-year yield had gained 2bps to 1.84% and the 20-year yield had shed 4bps to 2.41%.

In the cash futures market, expectations of a change in the actual cash rate, currently at 0.03%, hardened in favour of earlier rate rises. At the end of the day, contract prices implied the cash rate would rise gradually from the current rate of 0.030% to 0.12% by March 2022 and then increase at a somewhat faster rate through to December 2022 where that month’s contract price implied a rate of 0.88%.

The main driver of the headline inflation figure in the quarter was a 1.7% rise in housing costs, contributing 0.47 percentage points of the 0.76% (unadjusted) increase over the quarter. Transport prices also had a significant influence on the quarter, rising by 3.2% and contributing 0.40% percentage points to the quarterly total.

Here’s what a few economists thought about the figures:

Hayden Dimes, ANZ

The stronger trimmed mean print will put some pressure on the RBA to rethink its forward guidance for the cash rate. But while today’s print will put upward pressure on the trimmed mean forecasts for 2022, we think the RBA’s outlook for inflation in 2023 will continue to be driven by its expectations for wages. And we don’t think the RBA is likely to change its view on wages growth all that much. In which case, the forward guidance for the cash rate may remain centred on 2024, though perhaps with wording that indicates less confidence on the RBA’s part. This sets things up for an ongoing battle between the RBA’s outlook and market pricing.

Chris Read, Morgan Stanley Australia

Several headwinds that have seen Australia’s inflation lag other economies over 2021 are now reversing, which should contribute to strength over coming quarters. 1) Construction was a key contributor in the quarter, alongside fuel, [and] this is likely to continue and the Homebuilder grants which had pulled down costs over previous quarters are being phased out; 2) the decline in rents driven by the drop in net migration is

finished and these are now increasing in line with the strong housing market; and 3) the drag from the AUD appreciation over 2020 is lessening, which alongside supply chain pressures is seeing tradable goods inflation rise.

Justin Smirk, Westpac

The September quarter CPI was still under the push/pull influence of changing government support, subsidies and grants even if it has significantly fade. Now we are starting to see signs of prices adjust as the economy reopens just as there are global supply chain disruptions and local labour shortages. We are currently looking for core inflation to peak at just under 3% in late 2022 before easing back through 2023 and thus will be looking for signs in the December quarter CPI that we have to adjust our thinking.

George Tharenou, UBS Australia

It’s difficult to assess the true inflation impulse. While new housing and automotive fuel added more than 0.5%pts, they will lift again in Q4. The end of lockdown will ease extreme supply side constraints but global pressures seem more persistent and domestic demand will rebound sharply as households and businesses draw down on deposits built-up since COVID. UBS was already above consensus on our inflation outlook, but the rise came earlier than expected, with trimmed mean already above 2%. This is far stronger than the RBA’s very dovish base-line, which didn’t see this until 2023.

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