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Today’s release of the third quarter CPI data was broadly in line with market expectations. Headline CPI fell to 2.8% (which is just inside the RBA’s 2-3% target range) but the more closely watched Trimmed Mean (core inflation) remained somewhat elevated at 3.5%. The reason the RBA will be focused on the Trimmed Mean, rather than the headline CPI, will be largely driven by the fact that State energy and rent rebates are distorting headline inflation downwards.
These State initiatives have resulted in some extreme variation across the various Capital Cities so that headline CPI in Perth is running at 3.8% while in Brisbane (where QLD electricity rebates have essentially seen electricity prices fall by more than 50%) it is just 1.8%. Once we see the third quarter GDP data (due for release on Dec 4th) we will be releasing our regional CPI numbers.
While the decline in inflation will certainly be welcomed by the RBA, and CPI is falling somewhat faster than they were predicting in their last August Statement on Monetary Policy (expected 3% by Dec), the Trimmed Mean is tracking similarly to their projection (3.5% by Dec). As a result, the futures market has scaled back their expectations of rate cuts and the first 25bps cut is now not fully priced into the market until May next year. The RBA Board will be meeting to discuss rates again on Nov 5th, but do not expect any movement next week.
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