Inflation edges into RBA target range

The Reserve Bank of Australia’s preferred measure of inflation rose a higher than anticipated 0.7 per cent in the September quarter, lifting annual underlying inflation to 2.1 per cent to edge inside the bank’s target range.

It is the highest annual print in five years for core inflation, which strips out unusual price movements.

Price pressures for petrol and home building were major contributors to the jump in the consumer price index, as global oil producers and local home builders struggled to keep up with rebounding consumer demand and supply bottlenecks linked to COVID-19.

High levels of construction activity, shortages of building materials and supply disruptions underpinned the biggest price jump for new built homes since 2000 when the GST was introduced.

Headline inflation rose 0.8 per cent in the September quarter, in line with market expectations and taking the annual consumer price index to 3 per cent over the year to September 30.

The RBA’s more closely watched core inflation, known as the “trimmed mean”, was 0.2 of a percentage point ahead of market expectations of 0.5 per cent for the quarter.

Government bond yields jumped and the Australian dollar rose to US75.3¢ on the stronger inflation, as traders bet that the RBA would be forced to raise interest rates before its forward guidance of 2024.

CommSec chief economist Craig James said underlying annual inflation of 2.1 per cent now exceeds the RBA’s forecast of 1.75 per cent for December quarter.

“But it is still early days,” Mr James said.

“The Reserve Bank would need to see a few more quarterly moves of 0.7 per cent before it accepts that inflation is sustainably back in the 2-3 per cent target band.

“The Reserve Bank will be alert at this point, but not alarmed.”

RBA governor Philip Lowe has previously said inflation will need to do more than “trip over” 2 per cent for the bank to be convinced of sustained prices pressures that could lead to interest rate rises.

Consumer inflation expectations lifted to a 6½ year high this week, as petrol prices increased 10 per cent over the past fortnight, according to the ANZ -Roy Morgan consumer confidence survey.

“The notable development this week is a 0.3ppt rise in ‘weekly inflation expectations’ to 5.0 per cent,” ANZ Head of Australian Economics David Plank said. “This is the subindex’s highest value since December 2014.”

Mr Plank has noted consumer expectations tended to follow rather than lead inflation, and drew a strong connection with the petrol price rise.

Appearing before a Parliamentary committee on Wednesday before the latest inflation figures were published, Treasury Secretary Steven Kennedy said inflation expectations remained well anchored and most core measures were consistent with inflation targets.

However, he acknowledged expectations had shifted in recent months, and transitory pressures relating to COVID-19 supply side disruptions were likely to persist longer than anticipated.

“If supply shocks persist and lead to a rise in inflation expectations or shocks begin to have second round effects on broader prices, particularly wages, then central banks overseas are likely to bring forward the normalisation of monetary policy,” he said.

“Here in Australia, domestic inflation and inflation expectations remain moderate, and the Reserve Bank has noted that inflation is not expected to be consistently within their inflation target band until around 2024.”

The RBA wants to see inflation sustainably within its 2 per cent to 3 per cent target band before normalising monetary policy.

Dr Philip Lowe has indicated a key measure of sustainability will be wages growth above 3 per cent on an annualised basis.

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