Chance of rate cut this year all but vanishes after inflation surges

Chances of an interest rate cut by Christmas have all but disappeared after inflation jumped to its highest level in more than a year with signs that price pressures are broadening across the entire economy.

In a blow to the Albanese government’s claims to have inflation under control, the Australian Bureau of Statistics revealed on Wednesday that inflation jumped by 1.3 per cent in the September quarter, taking the annual rate to 3.2 per cent.

More troubling for the Reserve Bank, the closely watched measure of underlying inflation – which excludes unusually large movements in prices – lifted by a higher-than-expected full percentage point, taking the annual rate to 3 per cent.

Financial markets, which just a week ago put the chance of a rate cut at the RBA’s meeting next week at more than 60 per cent with a cut by year’s end fully priced-in, reduced the chance of rate relief to 5 per cent.

The chance of a rate cut by Christmas is now 40 per cent, with some economists warning the bank may not move from its current rate setting of 3.6 per cent.

Shadow treasurer Ted O’Brien took aim at the government over the figures, declaring they were “bad news for all families” hoping for a rate cut on Melbourne Cup day next week and that Treasurer Jim Chalmers must take responsibility for the jump.

“Given the treasurer always takes credit for when inflation falls, will he now take responsibility for today’s news of inflation increasing?” he asked in question time.

Chalmers fired back that the opposition had opposed many of the government’s cost-of-living measures and had been in power when inflation was higher.

“If they had their way and won the last election, Australians would be under more pressure, not less,” he said.

The RBA, which next week will update its key economic forecasts, had been expecting underlying inflation to climb by around 0.6 per cent this week.

Bank governor Michele Bullock this week flagged at the Australian Business Economists event in Sydney that 0.9 per cent result would be “a reasonably material miss”.

The ABS numbers had an immediate impact on financial markets. The Australian dollar climbed almost half a cent against the US dollar, reaching US66¢ on expectations of higher interest rate settings, while the ASX200 shed 0.7 per cent in the 30 minutes after the release of the data and was down 0.9 per cent for Wednesday.

The figures surprised markets because of the breadth of price increases.

While the annual jump in electricity prices (up 23.5 per cent) was broadly expected as government rebates were wound back, and rent increases continued to ease to 3.8 per cent – the lowest since December 2022 – price growth for services, including restaurants, dentists and vets, has risen.

The biggest price rises in the September quarter were housing (up 2.5 per cent), recreation and culture (up 1.9 per cent) and transport (up 1.2 per cent).

The increase in housing costs reflected the biggest rise in property rates and charges in over a decade. These rates and charges are generally reviewed and increased by councils in the September quarter, but the 6.3 per cent growth this year was the largest since 2014 and shared across all capital cities.

Domestic holiday travel also became more expensive in the September quarter because of higher accommodation and airfare prices.

There was some relief in key sectors. Annual inflation for insurance, which reached 16.4 per cent in early 2024, has now eased to 2.6 per cent. Inflation for rents has eased to a three-year low of 3.8 per cent, while fruit-and-vegetable inflation has fallen by 75 per cent over the past year.

EY chief economist Cherelle Murphy said trimmed mean inflation was worryingly moving away from the midpoint of the Reserve Bank’s target band after being within target for the past two quarters, and that rate cuts were unlikely until next year.

“The re-acceleration of the quarterly CPI will make the Reserve Bank very uncomfortable and means that a rate cut is off the table [for November] … and a December rate move looks highly unlikely too,” she said.

AMP deputy chief economist Diana Mousina likened the result to a horror story, given the broad range of price increases.

But she cautioned the result did not mean more rate cuts, most likely in February next year, were off the Reserve Bank’s agenda, with inflation likely to be lower when in the December quarter consumer price index report.

“We do not think that the September quarter inflation data is the start of a renewed rise in inflation, given the signal from price surveys and the faster unravelling in the labour market, which will mean softer wages and services inflation down the track,” she said.

Meanwhile, Chalmers has signalled that more reforms to lift the economy’s speed limit will be contained in the May budget.

In an address to the Australian Chamber of Commerce and Industry on Wednesday night, Chalmers said state governments were already using the $900 million National Productivity Fund to speed up housing construction and end unnecessary objections to commercial developments like supermarkets.

The ACT, Northern Territory and South Australian governments will share $20 million for changes to areas such as zoning and regulations around prefabricated housing.

With the mid-year budget update due in six weeks, Chalmers said the “main game” for reform would be next year’s budget.

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