Stubborn core inflation to stall RBA easing path
While headline inflation is under control, economists have said that the central bank will only cut rates once underlying price pressures improve.
The RBA is unlikely to budge on interest rates during its final board meeting of the year after underlying inflation crept up last month, economists have said.
ABS data released yesterday showed underlying inflation increased to 3.5 per cent in October, despite the headline figure coming in below expectations at 2.1 per cent.
RSM Australia economist Devika Shivadekar said the RBA would adopt a “cautious approach” and wait for a sustained decline in underlying inflation before cutting rates.
“The central bank has shifted its focus from headline to core inflation as a more reliable indicator of price pressures, emphasising the need for a sustained decline in core inflation over several quarters,” she said. “Underlying inflation … [remains] stubbornly above the RBA’s 2 to 3 per cent target range.”
Underlying inflation excluded volatile components like automotive fuel and electricity, which were impacted by Commonwealth energy bill relief fund rebates and state government rebates in Queensland and WA last month.
ABS head of prices statistics, Michelle Marquardt, said electricity dropped 35.6 per cent in the 12 months to October, the largest annual fall in the electricity series ever recorded in the CPI.
Automotive fuel prices also fell 11.5 per cent over the past 12 months after repeated price falls in recent months.
“The falls in electricity and fuel had a significant impact on the annual CPI measure this month,” Marquardt said.
Meanwhile, the top contributors to the annual movement were food and non-alcoholic beverages (+3.3 per cent), recreation and culture (+4.3 per cent) and alcohol and tobacco (+6.0 per cent).
Housing rose 0.2 per cent in the 12 months to October, down from a 1.6 per cent annual rise to September.
Fruit and vegetables rose 8.5 per cent in the 12 months to October, driven by a lower supply of produce including avocados, berries, cucumber and broccoli.
Bendigo Bank chief economist David Robertson said while markets previously anticipated a rate cut in February, consensus was now pointing toward the RBA's easing cycle beginning in May.
“The latest inflation data continues to support no change to official rates in December, but more evidence that the RBA should be cutting rates by May with the worst of the cost-of-living shock behind us,” Robertson said.
The cash rate currently sits at a 12-year high of 4.35 per cent. Robertson predicted the RBA would begin easing by cutting rates by 35 basis points to 4 per cent.
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