• Excluding volatile items, the inflation gauge was unchanged in September. On all measures, annual inflation is around 2.3-2.4 per cent.
• The Performance of Manufacturing index fell by 1.2 points to 44.1 in September. It was the seventh month that the index has been below a reading of 50 points, suggesting contraction in the sector. The index of selling prices fell from 45.8 to a decade low of 41.2.
• The daily RP Data-Rismark home value index rose by 1.4 per cent over September.
• Chinese manufacturing sector improves, with the official Purchasing Managers index for China rose from 49.2 to 49.8 in September, matching forecasts.

What does it all mean?

• Inflationary pressures are still well-contained, keeping the door open for a rate cut in the next few months. While we favour a move in November rather than October, we don’t hold the view too tightly. The latest survey shows manufacturing is still contracting, the services gauge will probably show a similar contraction this week, and inflation is contained. But on the other hand, economic growth is close to ‘trend’, home prices are rising, business lending is creeping higher, the Aussie dollar has eased in recent weeks and the global economic situation is improving.
• A forward-looking Reserve Bank probably still sees the glass as “half-full” rather than “half-empty”, suggesting that it will wait at least another month before cutting rates. In short, if the economy is not crying out for more stimulus, then why act? Better to keep the bullets in the gun in case they are needed in future months.
• Certainly the next batch of monthly home price data is likely to show firmer growth. The RP Data-Rismark home value index for September will be published tomorrow and may show a 1.4 per cent lift in Australian home prices for the month based on the daily observations of the series.

What do the figures show?

• The monthly inflation gauge rose by 0.2 per cent in September after a 0.6 per cent increase in August. The annual rate of inflation rose from 2.2 per cent to 2.4 per cent.
• The underlying rate (trimmed mean) rose by 0.1 per cent in September after a 0.6 per cent gain in August. The annual rate rose from 2.2 per cent to 2.3 per cent.
• Excluding volatile items like petrol and fruit & vegetables, the inflation gauge was unchanged in September after a 0.2 per cent rise in August. The tradable inflation measure rose by 0.4 per cent and the non-tradable inflation measure increased by 0.1 per cent in September. The annual rate of the measure excluding volatile items eased from 2.6 per cent to 2.4 per cent.
• TD Securities noted that “Contributing to the overall change in September were price rises for fruit and vegetables, domestic holiday travel and accommodation, and automotive fuel. These were offset by falls in rents, footwear, and audio, visual and computing equipment and services. The price of fruit and vegetables rose by 6.3 per cent in September.”
• The report also noted: “We have still not noticed any broad-based impact of the 1 July introduction of carbon pricing spilling over into prices this month. However, we will continue to watch for any evidence of more pass through to consumers in the months ahead.”
• TD Securities have finalised inflation forecasts: “With this September report we have finalised our CPI forecasts for the September quarter. We forecast headline inflation to increase by 0.8 per cent, to be 1.4 per cent higher than a year ago. We forecast underlying inflation to increase by 0.5 per cent in the quarter, lifting the annual rate slightly from 2.0 per cent to 2.1 per cent. We anticipate underlying inflation to remain closer to 2 per cent than 2.5 per cent by year-end.”

What is the importance of the economic data?

• The TD Securities/Melbourne Institute Monthly Inflation Gauge is designed to “provide a timely and accurate monthly measure of inflation in Australia”. The Bureau of Statistics only releases the Consumer Price Index on a quarterly basis.
• The Australian Industry Group and PricewaterhouseCoopers compile the Performance of Manufacturing Index (PMI) each month. The Australian PMI is the Australian equivalent of the US ISM manufacturing gauge. The PMI is one of the timeliest economic indicators released in Australia. The PMI is useful not just in showing how the manufacturing sector is performing but in providing some sense about where it is heading. The key ‘forward looking’ components are orders and employment.

What are the implications for interest rates and investors?

• It’s always important to remember that the Reserve Bank has to be forward looking when deciding on interest rate settings. While conditions in manufacturing, services and construction are soft at present, home prices are now rising solidly and the global economy appears to be settling. While it is a close call whether the Reserve Bank cuts rates tomorrow, on balance we believe it will probably wait a little longer before deciding on a rate cut.
• The lift in home prices is clearly good news for housing-dependent sectors.

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