Quarterly CPI analysis: Inflation is hotter than expected, but there’s no need to panic

The September quarterly CPI release shows that inflation is hotter than expected. An increase was expected, but not by this much. The annual trimmed mean rose by 3.0 per cent, well above the forecast by the Reserve Bank of Australia (RBA) and barely keeping inflation within the 2-3 per cent target range. 

No knee-jerk reactions needed

The increase in CPI was largely due to fiscal policy on the energy supply side of the economy, not due to an overheated demand side, so there is no need for a knee-jerk cash rate increase. Rather, this release reinforces that the current restrictive monetary policy setting is appropriate. 

November rate cut unlikely

The market anticipated that the RBA would cut the cash rate on the back of the recent spike in the unemployment rate. However, today’s CPI release supports continued patience from the RBA, and the market will likely adjust today to reflect that expectation. The spike in unemployment was due to an unusual increase in the number of people looking for work, rather than a loss of jobs, so a rate cut was unlikely even before today’s CPI release. 

The RBA will likely hold the cash rate steady at the current restrictive setting in November to keep downward pressure on inflation. Looking ahead, there is only room for one or two cuts before the policy setting returns to neutral. The RBA is likely to hold onto these until the economy shows it really needs them, which is unlikely to be this year.

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