Australia’s Inflation Surges to Highest Level in a Decade, RBA May Hike Rates Next Month

Australia’s inflation rate rose faster than expected in the third quarter of 2023, reaching the highest level in a decade and increasing the pressure on the Reserve Bank of Australia (RBA) to raise interest rates next month.

Inflation Driven by Fuel and Rents

According to the Australian Bureau of Statistics (ABS), the consumer price index (CPI) advanced 5.4% in the third quarter from a year earlier, more than economists’ estimate of 5.3%. The result was driven by automotive fuel and rents, which rose 14.9% and 6.1% respectively over the year. The CPI also shows that prices remain well above the RBA’s 2-3% target range.

Australia’s Inflation Surges to Highest Level in a Decade, RBA May Hike Rates Next Month
Australia’s Inflation Surges to Highest Level in a Decade, RBA May Hike Rates Next Month

The ABS said that the inflation outcome was influenced by a number of factors, including higher global oil pricessupply chain disruptionsstrong domestic demand and ongoing pandemic-related impacts. Some of these factors are expected to be temporary, while others may persist for longer.

Core Inflation Also Exceeds Forecasts

A closely watched measure of core inflation, which strips out volatile items and is monitored by the RBA, also exceeded forecasts. The trimmed mean CPI rose 5.2% in the third quarter from a year earlier, down from 5.9% in the second quarter but still above economists’ forecast of 5%. On a quarterly basis, it accelerated to 1.2% from an upwardly revised 1% in the second quarter.

The trimmed mean CPI is considered a better indicator of underlying inflation pressures than the headline CPI, as it excludes extreme price movements that may distort the overall picture. The RBA uses the trimmed mean CPI as its preferred measure of inflation for policy purposes.

RBA May Hike Rates Next Month

The higher-than-expected inflation data may prompt the RBA to hike interest rates at its next policy meeting on November 7, after keeping them unchanged at 2.35% for four consecutive meetings. The RBA has raised rates by 4 percentage points since May 2022, in response to rising inflation and strong economic growth.

The new RBA Governor, Michele Bullock, who took office on October 18, has signaled that the central bank is in data-dependent mode and will not hesitate to act if there is a material upgrade to its inflation outlook. She has also warned that a series of economic and geopolitical shocks mean that policymakers are struggling to look through price spikes from global events.

The market expectations of a rate hike next month have increased after the inflation report, with money market bets implying about an 80% chance of a 25-basis-point increase, up from around 40% before the release. The Australian dollar also extended gains and the three-year government bond yield jumped as high as 4.28%, a level last seen in 2011.

Some economists have also changed their rate call to a hike in November, citing the inflation data and the hawkish tone of Bullock. However, others have argued that rates have already peaked and the next move will be down, not up, as inflation will moderate in the coming quarters and growth will slow due to external headwinds.

The spotlight now shifts to Thursday, when Bullock and Assistant Governor Chris Kent will appear for testimony before a parliamentary panel in Canberra, where they may provide more clues on their policy stance and outlook.

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