By Stella Qiu

Australian Inflation Update

SYDNEY (Reuters) – Australian consumer price inflation slowed to a 3-1/2 year low in the third quarter, although the core measure remained sticky, reinforcing market expectations that the central bank will not begin cutting rates until next year.

Overall, the report was mixed, showing consumers benefiting from government electricity rebates and falling petrol prices, while service price pressures continued. This muted market reaction saw the Australian dollar edging up 0.1% to $0.6569, with three-year bond futures slipping 1 tick to 96.06.

Investors slightly reduced the likelihood of a rate cut from the Reserve Bank of Australia (RBA) in December and February to 26% and 42%, with April next year seen as the most likely time for the first easing.

Data from the Australian Bureau of Statistics revealed the consumer price index (CPI) rose 0.2% in the third quarter, below the forecast of a 0.3% increase. Annual inflation dropped to 2.8%, from 3.8%, returning to the RBA's 2-3% target band for the first time since 2021, a largely expected outcome.

This slowdown was mainly driven by a 17.3% drop in electricity prices due to government subsidies, as petrol prices fell 6.2% in the quarter. Policymakers are focused on core inflation, and the trimmed mean measure increased by 0.8% in the quarter, slightly above the forecast of 0.7%, but the annual pace slowed to 3.5% from 4.0%.

Stephen Smith, a partner at Deloitte Access Economics, stated, "The ABS data shows that the price pressures still present in the economy, such as rents, insurance premiums, and medical services, are primarily supply-side issues. These cannot be alleviated by further cash rate increases, reinforcing our view that prior interest rate hikes have effectively slowed the economy and curtailed demand-led inflation."

Service inflation continues to be a concern for the RBA, remaining elevated at 4.6% in Q3, slightly higher than the June quarter's 4.5%, and showing little change over the past year.

The central bank is set to release updated economic forecasts to guide its next policy decision on Tuesday.

Positive Impulse

In September alone, CPI rose a modest 2.1% compared to a year earlier, marking the lowest rate since July 2021. The trimmed mean measure slowed to 3.2%, just above the top of the target range.

The RBA has maintained its policy since November, considering the current cash rate of 4.35%—up from 0.1% during the pandemic—restrictive enough to achieve its inflation target while safeguarding employment gains.

Despite early rate cuts being argued against by a resilient labor market, the easing in annual core inflation aligns with the RBA's projection for it to slow to 3.5% by year-end.

Abhijit Surya, an Australia and New Zealand Economist at Capital Economics, noted, "Although the quarterly trimmed mean CPI is not yet rising at a pace consistent with the RBA's target range, we believe it will do so soon. This could pave the way for the Bank to start easing policy at its February meeting."