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Return to RBA's Target Range for inflation 2-3%

The latest Consumer Price Index (CPI) figures show that inflation has finally returned to the Reserve Bank of Australia’s (RBA) desired range of 2-3%.

During the September 2024 quarter, the CPI rose by 0.2%, bringing annual inflation down to 2.8% from 3.8% in the previous quarter, according to the Australian Bureau of Statistics (ABS).


This is the first time since March 2021 that annual inflation has been within the RBA’s target range, a goal the central bank has pursued since it began tightening monetary policy in May 2022. Michelle Marquardt, head of prices statistics at the ABS, noted that the 0.2% rise in the September quarter is the lowest since the June 2020 quarter, which saw a decline due to free childcare during the COVID-19 outbreak.


For context, imagine the prices of everyday items you buy, like groceries and entertainment, rising only slightly. The largest contributors to this modest increase were recreation and culture (up 1.3%) and food & non-alcoholic beverages (up 0.6%). However, these increases were balanced out by significant drops in electricity prices (down 17.3%) and fuel prices (down 6.7%).


The fall in petrol prices, driven by lower global oil demand, means you might have noticed cheaper fuel at the pump, reaching its lowest level since June 2023. Additionally, government rebates on energy bills across Australia led to a substantial decrease in electricity costs. Without these rebates, electricity prices would have actually increased by 0.7% this quarter.


These changes in fuel and electricity prices have helped slow down overall inflation. Goods inflation, which includes items like tobacco and new homes, rose by 1.4%, while services inflation, covering things like rent, insurance, and childcare, increased to 4.6% from 4.5% in the previous quarter.


On a monthly basis, the CPI indicator rose by 2.1% in September, down from 2.7% in August and 3.5% in July. The most significant contributors to this monthly rise were food & non-alcoholic beverages (up 3.3%), alcohol & tobacco (up 6.3%), and housing (up 1.6%).

Westpac’s chief economist, Luci Ellis, commented that headline inflation was slightly below expectations, with essential expenses like groceries and utilities coming in lower than anticipated.


However, some services costs were higher than expected. The trimmed mean measure, which excludes volatile items, was in line with expectations at 0.8% for the quarter and 3.5% annually, indicating that while inflation is still above target, it is trending downwards.

Krishna Bhimavarapu, an economist at State Street Global Advisors, highlighted that although headline CPI eased due to energy subsidies, there were positive signs in the data. Trimmed-mean inflation dropped by half a percentage point to 3.5% annually, which could support a more dovish stance from the RBA. Delaying such a shift might result in prolonged below-par economic growth.


Dwyfor Evans, head of APAC macro strategy at State Street, noted that lower oil prices and government subsidies are pushing Australian inflation down, but core prices remain high. The State Street PriceStats Australia series shows ongoing price pressures in healthcare, recreation, food, and insurance. This suggests that online prices this year are more similar to 2022 than 2023 and are significantly above the 10-year average.


Consensus expectations for Q3 disinflation highlight concerns that online price pressures in Australia remain high relative to the RBA’s 2-3% target. A cautious RBA may signal early 2025 for potential rate easing when it releases its monetary policy statement on November 5.


The concerns around prolonged sub-par economic growth are significant because they affect every Australian and their standard of living. With fewer job opportunities, stagnant wage growth, and reduced consumer spending, the impact is felt across the board. To address these issues, we hope to see rate easing early in 2025. This could be complemented by fiscal stimulus through infrastructure spending on projects like public transport and renewable energy, which would provide immediate employment and long-term economic benefits.


Supporting small businesses, which have been hit hardest throughout COVID-19 and haven’t had the opportunity to fully recover, is also crucial. Providing further tax relief through a small business restructuring program can help these businesses drive innovation and contribute to economic growth.


In summary, while the return of inflation to the RBA’s target range is a positive sign, addressing the broader economic challenges requires a multifaceted approach. By easing interest rates, investing in infrastructure, and supporting small businesses, we can work towards a more robust and resilient economy. These steps will not only help Australia recover from one of the toughest times but also pave the way for sustainable growth and improved living standards for all Australians.


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