Australia September Quarter Inflation Data

The Australian inflation data showed that price growth moderated in the September quarter and was basically in-line or slightly below consensus economist estimates. There are numerous metrics in the inflation figures. Firstly, headline inflation was up by 0.2% in the September quarter (consensus economists including ourselves were looking for +0.3%) or 2.8% over the year. This was down from 3.8% last quarter and was the lowest rate of annual inflation since March 2021 and puts headline price growth back in the RBA’s 2-3% inflation target band again (see the chart below). Headline inflation is the broadest measure of inflation because it reflects the prices consumers are actually paying. But the RBA’s preferred measure of inflation is the “trimmed mean” reading which takes out some of the most volatile items. On the trimmed mean measure, inflation rose by 0.8% (in line with economist estimates, although we were looking for +0.7%) with annual growth at 3.5%, down from 4% last quarter. This is the lowest rate of trimmed mean inflation since March 2022 but is still above the inflation target. Another measure of underlying inflation is the “weighted median” which rose by 0.9% in the September quarter and was 3.8% higher over the year. Today’s inflation data is also a tad lower than the Reserve Bank’s forecasts which had 2.9% for headline inflation and 3.6% for trimmed mean inflation.

There is also the September monthly inflation data. Remember that the monthly inflation data is not a full read on the inflation story because not every item is surveyed every month. On this measure, headline inflation was at 2.1% over the year to September or 3.2% on the trimmed mean reading.

A more detailed analysis of the components showed that services continue to be the biggest contributor to inflation (which includes both the weight of the item and the change in price) – with domestic holiday travel, rents and medical and hospital services being the top 3 contributors to inflation over the year to September, followed by takeaway foods and motor vehicles (both goods). Falls in electricity (from subsidies), tobacco, furniture, new dwelling purchase costs and petrol worked the other way and were the largest detractors from inflation in the past 12 months.

• Food and non-alcoholic beverages rose by 0.6% over the quarter, with eating out (+0.8%) a major contributor as well as meat and seafood (+1.1%) and fruit and vegetables (+1%), due to supply issues for products like berries, grapes, tomatoes and capsicums as well as higher cocoa prices (means a rise in chocolate prices) and eggs. Dairy prices fell by 0.4%.
• Alcohol and tobacco rose by 1.3% which is mostly a reflection of the biannual excise increase.
• Clothing and footwear fell by 0.7% which is a reflection of seasonal sales. The ABS pointed out that higher gold prices led to accessories prices rising by 1.4%.
• Housing fell by 0.1%. Rents rose by 1.6% and annual growth slowed to 6.7% (the lowest level since September 2023) which is a reflection of private rental growth slowing, but also the Commonwealth Rent Assistance which reduced rents by 0.01 percentage point – which isn’t much (with more to be reflected in the December quarter). Utilities prices fell by 7.6% because of the 17.3% decline in electricity prices while gas and other household fuels rose (by 7.3%) as well as water rates (+2.7%). The State and Federal government energy bill relief suppressed electricity prices by a large 0.7 percentage points. The impact of the energy bill relief will continue over the remainder of FY4-25, but the impact will be smaller from here. Some economists and the RBA are of the view that electricity prices will surge again in September 2025, when the bill relief is finished but there is a good chance that the government extends bill relief or that wholesale electricity prices are lower by then. Property rates rose by 4.9% which is a seasonal increase from councils. New dwelling purchase costs rose by 1% which shows that construction costs are still elevated, although lower compared to recent quarters with the rise in September the smallest increase for four quarters.
• Furnishings and household equipment rose by 0.9% with a 3.2% rise in child care costs and a 1.6% lift in hairdressing and personal grooming. Prices fell for carpets (-0.1%), major household appliances (-0.5%), cleaning products (-0.1%) and personal care products (-0.5%) which shows that there is some sign of goods deflation in specific areas.
• Health fell by 0.1% reflecting a 1.6% decline in pharmaceutical products due to changes in the Pharmaceutical Benefits Scheme while dental services rose. Medical and hospital services have the highest weight in the health group, but were flat this quarter (after large increases in prior quarters).
• Transport fell by 2.2% with a big (6.7%) fall in petrol prices (due to a lower oil price), a 0.8% decline in motor vehicles (from sale events) and a 2.1% drop in transport fares (due to cheaper public transport initiatives by state and territory governments).
• Communications rose by 0.5% from a rise in telecommunication equipment and services with internet plan prices rising.
• Recreation and culture rose by 1.3% with a 1.9% rise in international holiday travel prices and a 1.1% rise in domestic holiday travel, which is both seasonal but also reflects continued demand for travel (particularly from older Australians).
• Education rose by 0.4% from a lift tin preschool and primary school prices.
• Insurance and financial services rose by 1.2%, insurance prices rose by 2.8% which was the lowest increase in 6 quarters which indicates that insurance prices have probably peaked in annual terms and financial services prices were 0.7% higher.
• We can also look at the pure price change in items (and doesn’t take into account the weight of that item in the consumer spending basket), which is probably more what is observed by consumers (see the next chart). This shows the highest increase in insurance, tobacco, childcare and fruit prices over the past year. The largest price falls have been in electricity, fuel and furniture prices.

We can also look at the pure price change in items (and doesn’t take into account the weight of that item in the consumer spending basket), which is probably more what is observed by consumers (see the next chart). This shows the highest increase in insurance, tobacco, childcare and fruit prices over the past year. The largest price falls have been in electricity, fuel and furniture prices.

Despite the complications from the government’s electricity rebates, the component analysis shows that a lot of biggest drivers to inflation in the past 12 months (which have mostly been services) appear to have peaked and should slow from here, especially across the services sector. Administered prices, which are influenced by government policies are running at 3.7% over the year but market prices are up by 2.5% over the year to September – smack bang in the RBA’s 2-3% inflation target.

Monthly Inflation breadth shows that there is now a larger share of items in the basket with inflation running below 2% over the year (at 51%) compared to items with inflation above 3% (at 35%).

A lot has been said about how Australian inflation fares compared to our global peers with commentators including the RBA indicating that Australia still has further to go on the inflation battle. But after today’s data, the difference between Australian inflation and the rest of the world has narrowed. Core inflation is only slightly above global peers (see the first chart below) and headline inflation is in the range with global peers (see the second chart below).

As well, our AMP Inflation Pipeline Indicator suggests more downside to inflation from here. We think by the end of the year, trimmed mean inflation will be at 3.3% (RBA at 3.5%) and headline at 2.8% (RBA at 3%). Today’s data is consistent with the RBA keeping the cash rate unchanged at 4.35% for now. While the labour market is holding up very well, the slowing in inflation should allow for rate cuts to commence from February 2025 as economic activity will remain subdued, employment growth is likely to soften and the unemployment rate should trend up a little from here.