Benign September quarter inflation clears the way for a rate cut next week

Headline September quarter inflation came in right as expected at 0.6% in the quarter or 3.5% year on year.

However, the key is that the underlying measures came in at just 0.3% ini the quarter, which was half market expectations for a 0.6% gain and also below our expectation for a 0.5% rise. What’s more the average of the year ended underlying measures has now fallen to 2.45%, ie below the mid point of the RBA target range.  

Headline inflation was boosted by solid gains in prices for utilities (+7.2%), property rates (+5.2%) and international holiday travel and accomodation (+5.1%). Against this, softness at underlying level was evident pretty much across the board with weakness in prices for food, furnishings, household equipment, motor vehicles, TVs and computers and education. And while clothing prices rose a surprising 1.5% in the quarter they are only up 1.2% over the year. Soft underlying inflation was also confirmed by the just 1.6% rise over the last year in market goods and services excluding volatile items. 

Quite clearly weakness in domestic demand combined with the dampening impact on import prices from the strong $A has combined to push underlying inflation pressures back down after a brief pick up during the first half of the year. 

Interest rate implications
The benign September quarter underlying inflation result is consistent with our expectations for a cut in interest rates. 

The last few months have seen a deterioration in the global growth outlook, which is now flowing through to declines in the prices for our key commodity exports and softer than expected readings for domestic demand. And now the much anticipated September quarter inflation figures have confirmed that the inflation outlook is far more benign than the RBA was assuming a few months ago.

 Quite clearly current setting for interest rates – which asssumed much stronger global and Australian growth and a worsening profile for underlying inflation – are too high. 

We expect a 0.25% cut in the cash rate taking it to 4.5% at next week’s RBA Board meeting. The benign inflation rate likely also paves the way for more rate cuts next year.