Quarterly CPI analysis: Inflation falls to three-year low, but rate cuts remain distant
Quarterly CPI analysis: Inflation falls to three-year low, but rate cuts remain distant
The Consumer Price Index (CPI) fell to 2.8 per cent in the twelve months to September 2024 from 3.8 per cent in the June quarter, according to the latest data from the Australian Bureau of Statistics (ABS).
The headline inflation figure of a 0.2 per cent rise in the September quarter is the lowest outcome since the June 2020 quarter fall.
The trimmed mean, a measure of underlying inflation which strips out the biggest price swings, dropped to 3.5 per cent annually, down from 4.0 per cent in the June quarter.
Below, we take a closer look at the CPI data to explain what the figures mean for Australia’s battle against inflation and for the Reserve Bank of Australia’s (RBA) next rate decision.
No victory over inflation…yet
Today’s inflation number provides a distorted view that should not be interpreted on face-value. The drop in the September quarter CPI surpasses the RBA’s August forecast of a decline in inflation to 3.0 per cent by the end of this year due to low fuel prices. However, these forecasts include state and federal government energy rebates, Stage 3 tax cuts, and other fiscal policies, so this does not signal victory over inflation.
Our BDO economics forecast predicted a September quarter inflation of 3.5 per cent in the absence of these fiscal policies, aligning with the actual trimmed mean published today, or around 3.0 per cent with the fiscal measures included. We therefore expect the RBA to read today’s inflation number of 2.8 per cent with an added half-percentage point disclaimer and to respond with no rate cut next week. Our forecast only drops to 3.0 per cent sustainably in the March quarter of 2025 and we expect the cash rate to be reduced when the inflation rate for that quarter is published later in 2025.
Comfort while we wait for rate cuts
The RBA should welcome the continued downward trajectory of inflation amidst a balanced labour market that is not sparking inflation. The International Monetary Fund (IMF) has also mirrored the RBA’s forecasts. Both organisations forecast a jump in headline inflation outside of the RBA’s two to three per cent target range by the end of next year, as the face-value disinflationary effects of energy rebates become history, before easing into the target range in the second half of 2026. However, trimmed mean inflation is forecast to remain within the target range, allowing the RBA to reduce the cash rate.
While we wait for that to happen, we should seek comfort from our balanced labour market despite our forecast of a slow and steady rise in the unemployment rate in the coming months as the economy continues to grow slowly, interrupted by occasional shocks.
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