Both headline and trimmed mean inflation rose 1.2 per cent over the three months to 30 September (Q3), according to the latest print from the Australian Bureau of Statistics (ABS).
The result represents an upside surprise to markets, which had forecast trimmed mean inflation of 1 per cent and headline inflation of 1.1 per cent over the quarter.
In annual terms, trimmed mean inflation eased to just 5.2 per cent (20 bps above market consensus) and headline inflation eased to 5.4 per cent (10 bps above market consensus).
The quarterly CPI print is expected to undermine the Reserve Bank of Australia’s (RBA) disinflation timeline, which forecasts annualised inflation of 4.1 per cent by year’s end.
This comes amid a clear shift in the central bank’s monetary policy posture, with minutes from the September board meeting and recent commentary from governor Michele Bullock striking a more hawkish tone.
The minutes referenced a “low tolerance” for evidence of slower progress towards the central bank’s 2–3 per cent inflation target, while Ms Bullock recently stressed the RBA has no qualms about resuming its tightening cycle if the disinflation path is obstructed.
“The board will not hesitate to raise the cash rate further if there is a material upward revision to the outlook for inflation,” she said in an address to the 2023 Commonwealth Bank Global Markets Conference.
The share market is already pricing in a further hike to the cash rate, with the ASX 200 falling as much as 0.6 per cent following the release of the Q3 CPI data.
Senior economists from a raft of major financial institutions – including AMP, ANZ, the Commonwealth Bank, HSBC, and NAB – have also revised their near-term monetary policy outlook in response to the surprise quarterly CPI print.
The economists are now expecting the RBA to lift the cash rate by a further 25 bps to 4.35 per cent at its November board meeting.
“[We] consider the lift in underlying inflation over Q3 23 to be sufficiently strong for the RBA to act on their hiking bias at the upcoming board meeting,” Gareth Aird, head of Australian economics at the Commonwealth Bank, said.
According to Mr Aird, a hike next month would enable the RBA to retain its base case for a return to the 2–3 per cent inflation target by late 2025.
Deutsche Bank chief economist Phil O’Donaghoe has gone one step further, claiming the third quarter inflation data affirms his forecast for back-to-back 25 bps hikes in November and December – taking the cash rate to 4.6 per cent.
In contrast, AMP deputy chief economist Diana Mousina said while she expects further hikes from the RBA, 400 bps in cumulative tightening since May 2022 is sufficient.
“…We think that RBA needs to allow more time for the full lags of monetary policy to work through the economy and risks a significant slowing in economic growth in 2024 if it continues to raise interest rates,” she said.
“[We] think today’s inflation figures will cause some concern for the central bank and is likely to push the RBA over the line to hike the cash rate by another 0.25 per cent at its November meeting, taking the cash rate from 4.1 per cent to 4.35 per cent.”
Moreover, Creditor Watch’s chief economist, Anneke Thompson, questions whether additional hikes to the cash rate would be appropriate given the drivers of the higher Q3 CPI print.
“The RBA will be looking closely at the contributors to this and asking itself what a higher cash rate can actually do to slow these price rises,” she observed.
“In some key categories, such as rents, utilities, insurance and fuel, a cash rate increase will have little to no impact on any future pricing.
“This will be taken into careful consideration by the central bank.”
Sean Langcake, head of macroeconomics forecasting at Oxford Economics, said the data could still justify a fifth consecutive pause to the cash rate from the Reserve Bank, given its longer-term targets remain achievable.
“The Q3 CPI data have loomed as the pivotal piece of information ahead of the RBA’s November meeting – but there are still defensible cases for a pause or a hike at the next meeting,” he said.
“The RBA’s existing forecasts through 2023 and for a return of headline inflation to target in late 2025 still seem plausible.”
Governor Bullock is expected to shed more light on the central bank’s monetary policy rationale during her appearance before Senate Estimates on Thursday (26 October).