Australia’s consumer price inflation slows down to 3-1/2 year low in Q3

Australian consumer price inflation slowed to a 3-1/2 year low in the third quarter, though the core measure was still sticky and reinforced market wagers that the central bank won’t start cutting rates until next year.

Overall, the report was rather mixed, with consumers benefiting from government rebates on electricity and a drop in petrol, while services price pressures persisted.

That kept market reaction muted. Investors slightly pared the chance of a rate cut from the Reserve Bank of Australia this December and next February to just 24 per cent and 44 per cent.

Markets still see April next year as the most likely timing for the first easing.

Data from the Australian Bureau of Statistics on Wednesday showed the consumer price index (CPI) rose 0.2 per cent in the third quarter, under forecasts of a 0.3 per cent increase.

Annual inflation dropped to 2.8 per cent, from 3.8 per cent, taking it back into the RBA’s 2-3 per cent target band for the first time since 2021, a result that was largely expected.

The slowdown was driven by a 17.3 per cent drop in electricity prices due to the government’s subsidies, while petrol fell 6.2 per cent in the quarter.

Policymakers are more focused on core inflation and the trimmed mean measure increased by 0.8 per cent in the quarter, just above forecasts of a 0.7 per cent gain. The annual pace though slowed to 3.5 per cent from 4.0 per cent.

Commonwealth Bank of Australia on Wednesday abandoned its call for a first rate cut in December as the core measure was a touch firmer than it had expected. It is now pencilling in a cut in February next year, along with the other three big banks in Australia.

“The process of normalising the cash rate will be a story for 2025,” said Gareth Aird, head of Australian economics at CBA.

Services inflation remains a source of concern for the RBA, staying elevated at 4.6 per cent in the third quarter, slightly higher than the June quarter’s 4.5 per cent, and little changed over the past 12 months.

The central bank will have an updated set of economic forecasts when it decides on its next policy move on Tuesday.

The slow easing in inflation had Australian grocer Woolworths warning on Wednesday that earnings from its food division may fall as price-conscious consumers hunt for bargains.

For September alone, CPI rose a muted 2.1 per cent compared with a year earlier, the lowest since July 2021. The trimmed mean measure slowed to 3.2 per cent, just a touch above the top of the target band.

The RBA has held its policy steady since November, judging the current cash rate of 4.35 per cent - up from 0.1 per cent during the pandemic - is restrictive enough to bring inflation to its target band of 2-3 per cent while preserving employment gains.

The labour market has stayed surprisingly resilient, an argument against early rate cuts. But the easing in annual core inflation comes ahead of the RBA’s projection for it to slow to 3.5 per cent by the end of the year.

“Although quarterly trimmed mean CPI is not yet rising at pace consistent with the RBA’s target range, we think it will do so before long,” Abhijit Surya, Australia and New Zealand Economist at Capital Economics.

“That should pave the way for the Bank to begin easing policy at its meeting next February,” said Surya.

Meanwhile the Australian grocer Woolworths warned first-half profit from its main Australian food division would dip as a hunt for bargains and intense scrutiny of supermarkets during a cost-of-living crisis lower shelf prices, sending its shares tumbling.