Reserve Bank to reflect heavily on new CPI data ahead of rate decision

THE Commonwealth Bank said Australia’s September quarter inflation figures are expected to show little further progress in bringing underlying price pressures down, putting the Reserve Bank's next interest rate decision firmly in focus.

CommBank senior economist Trent Saunders said he expects the key trimmed mean measure of inflation - the RBA’s preferred measure, which excludes one-off spikes and outliers to measure underlying inflation - to have risen one per cent over the September quarter, leaving the annual rate at 3.6 per cent.

CommBank economists expect headline inflation to rise 1.3 per cent over the quarter, and 3.9 per cent over the year, when the Australian Bureau of Statistics releases the consumer price index (CPI) figures on Wednesday, less than a week before the RBA’s next monetary policy decision on November 3.

If the forecast is right, it would mark a fifth consecutive quarter in which trimmed mean inflation has risen by between 0.8 per cent and one per cent.

The result would also be stronger than the RBA’s August forecast for a 0.8 per cent quarterly rise in trimmed mean inflation, although Saunders said the strength already seen in July and August means a on per cent result is unlikely to surprise the RBA’s Board.

That follows August inflation data showing headline inflation had risen to four per cent while underlying inflation remained at 3.6 per cent.

“While our baseline remains for the RBA to leave the cash rate unchanged, the decision will depend heavily on the outcome and composition of next week’s CPI report,” Saunders said.

The RBA has already increased the cash rate four times this year, most recently lifting it by 25 basis points to 4.60 per cent in September.

The September rate rise followed stronger inflation and mounting concerns about domestic price pressures.

But Saunders said the meeting remained “live” and the decision would depend heavily on both the headline CPI result and what was driving it.

Uncertainty increased after RBA deputy governor Andrew Hauser said this week the inflation outlook looked "materially worse" than the RBA had projected in August.

CBA’s market strategy and rates research team said Hauser’s comments caused a sharp repricing in interest rate markets, with market-implied expectations of a November increase jumping from about 24 per cent to 56 per cent.

The RBA is balancing those inflation concerns against signs of softer economic activity, including weaker labour market conditions and subdued consumption growth.

Saunders said an important question for the RBA Board will be whether the CPI shows price pressures becoming more broad-based or persistent, particularly in services.

Petrol prices are expected to make another large contribution to inflation in the September data.

CBA forecasts fuel prices rose 9.8% in September after a 14.8% increase in August, taking annual fuel inflation to about 24%.

Fuel alone is expected to add around 0.3 percentage points to the monthly headline CPI increase.

CBA forecasts annual headline inflation rose from 4.0% in August to 4.2% in September.

Services are another area the RBA will be watching closely. CBA expects annual market services inflation to rise from 4.1% to 4.3%, suggesting domestic price pressures remain firm.

There are some signs inflation in new housing costs is starting to ease.

CPI data does not include mortgage interest repayments but does track other housing costs including rents, new dwelling construction, utilities, council rates and property repairs.

CBA expects new dwelling prices to have risen 0.2 per cent in September, with annual inflation slowing from 5.4 per cent to 4.9 per cent.

Construction costs pushed new home prices higher earlier this year but weaker demand for new homes and softer conditions in the established property market are expected to increasingly limit builders’ ability to pass higher costs on to buyers.

Rent pressures remain firm, with annual rent inflation forecast at around 3.5 per cent. CBA said low vacancy rates and tight rental conditions continue to support rental growth.

Property rates and charges are also forecast to have risen 4.3 per cent in September.

The housing slowdown is one of several signs that higher interest rates are feeding through the economy.

“We expect underlying inflation to improve beyond the September quarter, but only gradually, with a risk that progress may be too slow for the RBA,” Saunders said.

Softer household demand, a weaker labour market and slower housing activity should increasingly make it harder for businesses to pass higher costs through to consumers.

But persistent services inflation and higher input costs, including fuel, could slow that improvement.