Australia's annual inflation rate jumped to 4.3% in September , up from 4.0% in August, keeping pressure on the Reserve Bank ahead of Tuesday's interest rate decision.
Author
- Isaac Gross
Lecturer in Economics, Monash University
Market expectations for another rate rise next week - which would be the fifth this year - surged to 80% after the inflation report.
Petrol and holiday costs helped drive the increase. But the more important test for the bank was underlying inflation: the RBA's preferred measure of quarterly inflation, the quarterly trimmed mean , rose 1.0%, up from 0.8% in June.
Fuel and travel costs are pushing up prices
The headline consumer price index (CPI) rose 0.6% in September, the Australian Bureau of Statistics reported . The biggest driver was automotive fuel prices, which jumped 9.4% in the month as world oil prices increased, leaving them 23.6% higher than a year earlier.
Domestic holiday travel and accommodation rose 8.0% in September, reflecting school holidays and major sporting events. These increases help explain the headline increase - without establishing that every part of the economy is overheating.
Housing inflation actually eased to 5.2% annually, down from 5.7% in August. New dwelling prices were unchanged over the month as builders' discounts offset increases in base prices. Electricity prices remained 12.8% higher over the year, largely reflecting expired federal government rebates.
Higher petrol prices squeeze household budgets and raise businesses' delivery costs. An interest rate rise cannot produce more oil, but it can slow spending across the economy and make it harder for businesses to pass on higher costs.
The underlying test
The underlying "trimmed mean" measure removes unusually large price rises and falls to give a clearer picture of the broader trend. It is the one measure the RBA pays the most attention to when setting interest rates.
On this measure, underlying inflation rose 1.0% in the September quarter. That quarterly increase matched economists' expectations.
A quarterly pace of 1.0%, if sustained, would be well above the RBA's 2-3% annual target. That is a warning about momentum, not a forecast.
The annual rate edged up to 3.7%, above the 3.6% forecast in a Bloomberg survey reported by Capital Brief .
Could the surcharge ban add to inflation?
Another possible complication is the removal of card payment surcharges . Visa, Mastercard and EFTPOS introduced no-surcharge rules on October 1.
Businesses still pay to accept cards. Some may recover those costs through higher advertised prices rather than a separate fee at the terminal.
A $5 coffee with a 10-cent card surcharge could become a $5.10 coffee without one. The card customer pays the same total, while someone who previously paid cash could pay more.
The RBA notes that payment surcharges are not included in the CPI. But if businesses build the costs into final prices, that would lift measured inflation.
In March, the Reserve Bank estimated that folding existing card surcharges into advertised prices could lift the consumer price index by around 0.1% .
This is not an extra 0.1 percentage points of inflation every year, nor an entirely unexpected shock.
An inflation surprise would require repricing beyond what forecasters had allowed for. On the other hand, lower payment costs and competition could limit increases.
The inflation report today covers September, before the rules changed. Businesses might have repriced in anticipation, but that remains a hypothesis requiring evidence. October will provide the first full month after implementation; higher cafe prices alone would not establish causation.
What this means for a November hike
The figures add weight to the risk of another rate hike at the next RBA meeting on November 3, although quarterly underlying inflation matched expectations.
My own model of financial market data suggests that the odds of an interest rate hike have soared to 80% , compared with 56% earlier this week.
RBA Deputy Governor Andrew Hauser said last week the inflation outlook had deteriorated substantially relative to the bank's August forecasts, citing energy prices and constraints on supply.
In a 60 Minutes interview broadcast on October 25, Assistant Governor Sarah Hunter described demand as too strong relative to supply. She warned about overseas cost increases becoming embedded in domestic inflation, while declining to speculate on the next RBA decision.
The cash rate is already at 4.60%, following September's quarter-point increase. Those higher borrowing costs take time to restrain spending.
Persistent underlying inflation strengthens the case for further action. But the fuel-driven headline increase needs to be weighed against the more modest monthly underlying result and weaker consumption and rising unemployment, which were acknowledged by Hauser.
A hold would give the past four rate increases more time to work through the economy. It would not necessarily mean the tightening cycle was over.
The details of where the inflation is coming from, and the bank's updated forecasts to be released next week as well, will matter more than the headline figures alone.
Isaac Gross does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.
