Here Comes The Sun (And Maybe Some Rate Cuts)!

Today's figures from the Australian Bureau of Statistics (ABS) show a 0.2% increase in the headline Consumer Price Index (CPI) for the September 2024 quarter, resulting in a 2.8% annual rise. The more important trimmed mean measure, which smooths out price volatility driven by one-off factors, rose by 0.8% quarter-on-quarter and 3.5% year-on-year.

The data are unlikely to prompt a change in the cash rate at next week’s Reserve Bank of Australia (RBA) board meeting, even with headline inflation falling within the RBA’s target range. While these figures are encouraging, the RBA is expected to stay pat at 4.35% next Tuesday due to continued tightness in the labour market, which remains a focal point amid strong job creation. The dip in headline inflation was anticipated, largely due to subsidies and global influences. However, with key retail events like Black Friday, Cyber Monday, and the holiday season approaching, consumer spending is now critical for both the RBA and businesses, presenting a possible boost in demand. Whether this will influence the RBA to delay a rate cut remains to be seen, but for now we adjust our expectations for the easing cycle to begin in 1Q25.

Monetary Policy Implications 

While the temptation to consider rate cuts grows, the RBA remains mindful of the risks of prematurely easing monetary policy, especially in the face of a tight labour market and external economic pressures. Many in the market are eager (including us!) for the RBA to shift towards easing, hopeful that the drop in inflation might be a signal to act. However, the reality isn’t so straightforward. 

Economic activity has no doubt been weak and businesses continue to report less than favourable conditions to operate in. Yet, the labour market remains strong, indicating stable earning power. Australia’s robust labour market stands as both an asset and a constraint. Low unemployment has served as a bulwark against a major downturn, supporting household incomes and spending. However, it also restricts the RBA’s ability to cut rates sooner, as a tight labour market can fuel wage growth, potentially reigniting inflationary pressures. In this context, any easing won’t be axiomatic; it will require a clear, data-driven rationale rather than a reactive stance.

Meanwhile, retail sales, recently registered an uptick driven by favourable weather conditions and bulkier household budgets thanks to the tax cuts and subsidies reducing out-of-pocket expenses. The monetary policy channel’s structure in Australia means adjustments reverberate faster across sectors, notably consumer spending, especially in the year’s final months. With Black Friday and Cyber Monday sales, and the holiday season around the corner, we’re closely watching if these events will drive a notable boost in demand.

The challenge for the central bank now is to identify whether the uptick in retail activity towards the year-end reflects pent-up demand or if is it likely going to be a sustained consumer revival. Should it be the latter, a resumption of inflation-driving spending could potentially force the RBA to delay the rate cuts further back into the new year. However, should it be the former and the RBA choose to delay its pivot, we are likely facing an extended period of subpar growth.

On the international front, the RBA’s calculus is further complicated by significant international dynamics. The US economy is pressing forward, while China, Australia’s largest trading partner, is at risk of economic stagnation reminiscent of Japan’s “lost decade.” Should China’s economy weaken further, Australia could feel the ripple effects through reduced trade and capital inflows, as Chinese investors begin to liquidate assets to address their own financial obligations. These external pressures reinforce the RBA’s need to be adaptable; a misstep could compound risks already presented by unpredictable international markets.

In sum, while there is understandable enthusiasm for a potential policy pivot, the RBA must remain vigilant, balancing the need to support growth with the imperative to prevent inflationary pressures from reemerging.

CPI Movers and Shakers

In the September quarter, annual CPI inflation slowed to 2.8%, primarily due to significant decreases in electricity and automotive fuel prices. Electricity prices dropped 17.3% in the quarter, largely driven by the Commonwealth Energy Bill Relief Fund and additional state government rebates in Queensland, Western Australia, and Tasmania, while automotive fuel prices declined by 6.7%, as lower global demand reduced oil prices. 

Goods inflation also eased sharply to 1.4%, down from 3.2% in the June quarter. In contrast, services inflation remained high at 4.6%, driven by persistent increases in rents, insurance, education, and medical services. Although rental price growth moderated slightly to 6.7% annually due to adjustments in Commonwealth Rent Assistance, low vacancy rates continued to exert upward pressure. 

Meanwhile, the CPI saw a modest 0.2% rise quarterly, with gains in recreation and culture (+1.3%) and food and non-alcoholic beverages (+0.6%), led by higher demand for holiday travel and increased food costs.

By capital cities, Melbourne saw prices rise the most by 0.7% sequentially, while Sydney and Adelaide held the second spot jointly with costs increasing by 0.5% in both cities. In contrast, Hobart (-1.1%), Brisbane (-0.9%) and Perth (-0.4%) saw prices fall in the quarter mainly dragged by a fall in electricity prices.