Inflation came in well above expectations in the September quarter, but the case for an interest rate cut next month remains solid.
The consumer price index (CPI) rose by 1.4 per cent between the June and September quarters, lifting the annual inflation rate to 2.0 per cent from 1.2 per cent, according to data from the Australian Bureau of Statistics (ABS) on Wednesday.
On average, the two measures of underlying inflation favoured by the Reserve Bank of Australia (RBA) posted rises of 0.75 per cent in the quarter and 2.5 per cent over the year.
In both cases, economists’ expectations were beaten – they had expected annual CPI inflation to be 1.7 per cent and underlying inflation to be around 2.2 per cent.
The main offender was a small subset of the index – electricity, gas and other household fuels which, taken together, rose by 14.9 per cent in the quarter and 18.6 per cent through the year.
Those two components make up only 3.3 per cent of the basket of goods and services measured by the CPI.
If not for their latest outsized rises, the CPI would have risen only 0.6 per cent rather than 1.4 per cent in the quarter, and by 1.5 per cent rather than 2.0 per cent though the year.
There was a similar pattern in the previous September quarter, when the CPI rose by 1.1 per cent in the quarter but would have increased only 0.4 per cent if not for price rises averaging 10.7 per cent for gas and electricity.
In making its next decision on interest rates on Melbourne Cup day – November 6 – the RBA’s board will “look through” the temporary nature of the part of the rise driven by the carbon tax, which kicked in on July 1.
And it will note that the other main factor – the ability of energy distributors to pass on the cost of overinvestment to their hapless customers – is nothing to do with the inflationary pressures the RBA is able to control.
Even without taking these things into account, both headline and underlying inflation are still in line with the RBA’s two to three per cent medium-term target.
The other significant set of data released on Wednesday should cement the case for a cut, which would take the cash rate to 3.0 per cent from 3.25 per cent.
The internet vacancy index compiled by the Department of Education, Employment and Workplace Relations fell by 3.7 per cent in September in trend terms to be down by 19.6 per cent from a year earlier.
Having fallen under the low of early 2009 amid the fallout from the global financial crisis, the index is now at its lowest level since its inception in January 2006.
The latest figures from the Australian Bureau of Statistics (ABS) show the trend in employment is already as flat as a pancake.
And these vacancies figures suggest that if the trend does change in the near future it will most likely be for the worse.
Against that background, a blip up in the CPI thanks to well-explained, one-off factors unrelated to underlying inflationary pressures should not get in the way of a growth-supporting rate cut from the central bank.
