Inflation falls to March 2021 levels

The Australian Bureau of Statistics (ABS) reported significant decreases in both the September monthly and quarterly inflation rates. Critically, both data sets indicate inflation is trending downwards after a period of flat or slightly increasing inflation that had pundits concerned a few months ago would lead to an interest rate rise. Those fears have been allayed.

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Starting with monthly inflation, the ABS reported a decline to 2.1%, down from 2.7% in August. Moreover, this is the equal lowest monthly inflation since March 2021. The following chart shows that monthly inflation is only slightly above the lower bound of the Reserve Bank of Australia’s 2-3% target range.

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The September quarterly inflation decline was even more impressive, falling from 3.8% in the June quarter to 2.8%. As our next chart demonstrates, this is the first time quarterly inflation has been below the upper 3% target range since March 2021.

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Overall, I think most analysts expected higher inflation this round. However, despite the better-than-anticipated figures, the earliest we might see a rate cut is still 3-4 months away, around mid-February next year. This is because the RBA meets on Melbourne Cup Day next Tuesday, but rates will not be cut then as both inflation figures are within the target range. Even if monthly inflation falls below 2% before the following RBA meeting in early December, they will likely wait for the December quarterly inflation figures released in late January 2025. The RBA is unlikely to act until both monthly and quarterly are below 2%.

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We will not receive the December quarterly inflation figures until the end of January 2025, so the RBA will have them before their meeting in mid-February 2025. Given the downward trend in monthly inflation, it is likely to be below 2%. That leaves the December quarter figures. If December sees the same fall as September, quarterly inflation would also be below 2%. Considering the impact of the cost of living on household budgets, I think it would be almost impossible for the RBA not to cut rates in this scenario.

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The only qualifier I would add to this analysis is that if the next monthly inflation falls incredibly steeply, the RBA may act in December, but this is unlikely.

Review by Ryan Brierty