A look at recent inflation data.

• September quarter 2024:

  • Quarterly increase: CPI rose 0.2% in the quarter.
  • Annual inflation: CPI rose 2.8% over the twelve months to September 2024, marking the first time since 2021 that annual inflation fell within the Reserve Bank of Australia’s (RBA) target range of 2-3%.

• Shortened mean inflation:

  • This measure of core inflation rose 0.8% in the quarter, with an annual decline of 3.5% from 4.0% in the previous quarter, pointing to persistent core inflation pressures.

Implications for monetary policy

• Despite headline inflation returning to its target range, the RBA is wary of the “sticky” nature of core inflation, which remains above target.
• As a result, the RBA kept the cash rate at 4.35%, underscoring the need for sustained evidence of inflation’s alignment with target before considering a rate cut.

• Market expectations:

  • Financial markets have adjusted their expectations, now predicting a potential rate cut in early 2025, contingent on continued favorable inflation data.

While headline inflation falling within the RBA’s target range is a positive development, the persistence of elevated core inflation suggests the RBA is likely to maintain its current monetary policy stance until there is more consistent evidence that inflation is sustainably in line with its targets.

• This snapshot from the ForexLive calendar of economic data, access it here.
• Times in the far left column are GMT.
• The numbers in the far right column are the ‘previous’ (previous month/quarter as the case may be) result. The number in the column next to it, where the number is, is the expected consensus median.

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Australian monthly CPI data

• The monthly CPI indicator was introduced in October 2022 as a complementary measure to the long-established quarterly CPI.
• It provides a more frequent overview of inflation trends in Australia by tracking price movements in selected categories of goods and services each month.
• However, the monthly CPI is considered an “experimental” series and has limitations:
  • It covers about 62–70% of the items in the quarterly CPI basket, which means that some categories are excluded, such as services with less frequent price changes (eg education and health).
  • It is subject to revision, especially as more data becomes available or seasonal adjustments are made.
  • Seasonal adjustment processes can create some volatility and reduce interpretability in the short term.

Why quarterly CPI data is more relevant

1. Comprehensive coverage:

   • The quarterly CPI covers the entire basket of goods and services. This comprehensive review ensures that categories with less frequent price changes are captured.
   • For example, items such as school fees (updated annually) or insurance premiums may be omitted or underrepresented in monthly data.

2. Stability and accuracy:

   • Quarterly data is less volatile because it aggregates price movements over three months, smoothing out short-term fluctuations.
   • It is not subject to the same degree of revision as the experimental monthly indicator.

3. Politics and decision-making:

   • The Reserve Bank of Australia (RBA) relies heavily on quarterly CPI data for its monetary policy decisions, such as setting interest rates, because of its stability and accuracy.
   • Quarterly data is aligned with international practice, making it easier to compare inflation trends in Australia with those in other countries.

4. Economic patterns:

   • Australia has a relatively small economy with pronounced seasonal patterns in prices, which quarterly data capture more effectively. For example, changes in the price of food, education and holidays often coincide with certain times of the year.

How the monthly CPI fits

• The monthly CPI is useful for tracking inflation trends in near real time, especially in volatile economic conditions.
• It complements quarterly data by providing early signals of inflationary pressures, allowing policymakers and analysts to respond more quickly if needed.
• However, it is generally viewed as a preliminary indicator rather than a stand-alone measure for policy or long-term analysis.