Underlying inflation makes a November rate hike increasingly difficult to avoid

BDO Australia chief economist, Anders Magnusson, provides comment on today’s inflation figures.

Today’s inflation figures strengthen the case for another increase in the cash rate in November.

Annual trimmed mean inflation of 3.6 per cent in September shows that Australia’s underlying inflation problem remains persistent despite already restrictive monetary policy. In August, the RBA forecast the measure to decrease to 3.3 per cent by December, however the increase to 3.6 per cent in September makes that forecast look too optimistic.

The inflation pressure is coming from two directions. Australia was already dealing with persistent domestic inflation before the energy crisis, reflecting capacity constraints and weak productivity growth. External pressures from higher energy prices and disrupted global supply are adding another layer of inflation on top.

The important signal in today’s figures is therefore not simply the high headline CPI result. It is that underlying inflation remains too high. That makes it increasingly difficult for the RBA to treat external inflation pressures as something it can simply look through.

There is a genuine trade-off. The labour market is weakening and economic growth is already subdued, so another increase will make conditions tougher for households and businesses. However, allowing inflation to remain persistently above target risks lifting inflation expectations and requiring an even larger adjustment later.

Today’s result makes a November increase difficult for the RBA to avoid.