AMP’s chief economist, Shane Oliver, predicted a steady cooling trend, noting Australia’s inflation has lagged behind global surges, peaking later in 2022 and now falling in line with US and UK levels.
Oliver expects Wednesday’s ABS data to reveal underlying inflation at 3.4 per cent this quarter, down from 3.9 per cent in June – a drop he says could prompt the RBA to cut rates sooner than anticipated.
“Our base case remains for the RBA to start cutting in February next year, but a cut in December still can’t be ruled out if September quarter trimmed mean inflation comes in as forecast,” the chief economist said in a recent market note.
“Market expectations for just a 30 per cent chance of a rate cut in December and 70 per cent for February now look to have swung too pessimistic after being at 92 per cent and more than 100 per cent, respectively, in early September.”
On headline inflation, Oliver forecasts a drop to 2.8 per cent year-over-year, down from 3.8 per cent in June – largely influenced by government energy rebates and falling fuel prices. However, he cautioned, these figures are volatile and unreliable guides to real inflation trends.
“Our forecasts are slightly below RBA forecasts for 2.9 per cent year-on-year headline inflation and 3.6 per cent year-on-year for trimmed mean inflation but given strong jobs data and other indicators of economic resilience probably won’t be enough to tip the RBA over into a rate cut in November,” Oliver said.
CBA economist Stephen Wu shares Oliver’s optimism, expecting headline inflation to ease to 2.9 per cent annually, marking the first time it would be within the RBA’s target range since the pandemic.
But like Oliver, Wu said in a market note this shift is largely due to government rebates on energy costs and reflect only a temporary influence.
More importantly, he predicted trimmed mean CPI of 0.7 per cent for the quarter would bring the annual figure down to 3.4 per cent.
On a six-month basis, Wu sees core inflation sitting at 3.0 per cent – the RBA’s sweet spot.
“Our call for a rate cut by year-end is contingent on a trimmed mean CPI inflation outcome that is not higher than 0.7 per cent,” Wu said. “We think a weaker-than-expected inflation outcome is the primary signal the RBA will need to see before they will be willing to join other central banks and start normalising interest rates.”
Recent, significant rate cuts by global central banks have left the RBA on a different path, choosing a more cautious approach to interest rate adjustments.
Last week, GSFM investment specialist Stephen Miller explained that the RBA may soon be in a position to see some light at the end of the tunnel on inflation.
“If, as I suspect, labour market outcomes and inflation outcomes will be broadly in line with RBA forecasts, then the RBA might reasonably expect to cut rates in February,” he said.
However, also last week, the IMF said Australia’s inflation will drop to 3 per cent by the end of 2024, aided by subsidies like energy rebates, before rising again to 3.6 per cent by the close of 2025.
This contrasts with the Reserve Bank’s projections, which anticipate inflation falling within its target range of 2–3 per cent by late 2025 and approaching the midpoint of the band by 2026.
Speaking to InvestorDaily on the matter, Miller said he takes it “with a grain of salt”.
“I’d much prefer to believe the RBA forecasts,” Miller said, pointing out that the IMF’s predictions reflect headline inflation, which includes the impact of subsidies.
“The reacceleration looks a little curious … As far as monetary policy is concerned, the most important are the trimmed mean outcomes in any case and I don’t have much cause to disagree with the RBA forecasts.”
