Australia's inflation proves stubborn as underlying prices outpace RBA forecasts

Australia's annual inflation rate rose to 4.3% in September, up from 4.0% in August, while underlying inflation edged higher to 3.7% from 3.6%, according to new data from the Australian Bureau of Statistics.

The increase was driven largely by housing and fuel costs, with the result reinforcing concerns that inflation is proving more persistent than the Reserve Bank had hoped just days before its next cash rate decision on 3 November.

The ABS reported the Consumer Price Index (CPI) rose 0.8% over the month of September, while quarterly data released alongside the monthly figures showed headline inflation increased 1.3% in the September quarter.

The policy-relevant trimmed mean measure rose 1.0% over the quarter, exceeding the RBA's most recent forecast of 0.8%.

The quarterly trimmed mean result was broadly in line with major bank forecasts, which had tipped a reading of between 0.9% and 1.0%, but it also marked another quarter in which underlying inflation remained well above levels consistent with the central bank's 2-3% target band.

Housing remains the biggest source of inflation pressure

ABS head of price statistics Rachael McCririck said housing continued to be the largest contributor to annual inflation.

"Housing was the largest contributor to annual inflation in September, rising by 5.2 per cent."

Annual housing inflation slowed from 5.7% in August to 5.2% in September, but remained elevated due to increases in new dwelling construction costs and electricity prices.

"Annual inflation of 5.2 per cent for housing reflected rising costs for both new dwellings and electricity. New dwelling prices rose 4.7 per cent in the 12 months to September as builders passed on higher costs for materials and labour. This is down from 5.4 per cent in the 12 months to August," Ms McCririck said.

Electricity prices rose 12.8% over the year, largely due to the gradual expiry of Commonwealth electricity bill rebates.

Property rates and charges also remained elevated, rising 5.6% annually as councils implemented higher rates, levies and waste charges at the start of the financial year.

Fuel prices continue to add to inflation

Transport was the second-largest contributor to inflation, with prices rising 8.7% over the year.

The biggest driver was automotive fuel, which surged 23.6% annually and 9.4% during September alone as higher global oil prices flowed through to Australian bowsers.

Ms McCririck said fuel's sharp rise was one of the key reasons headline inflation rose faster than underlying inflation.

"On a monthly basis, automotive fuel prices rose 9.4 per cent in September, compared to a rise of 14.8 per cent in August. This was driven by higher world oil prices."

Automotive fuel is excluded from the trimmed mean measure, making it a key factor behind the difference between headline inflation of 4.3% and trimmed mean inflation of 3.6%.

All eyes turn to the RBA before November decision

Today's inflation figures are likely to be among the most closely scrutinised pieces of data ahead of the Reserve Bank's next cash rate decision on 3 November.

September quarter inflation was broadly in line with economists' expectations, but the key underlying measure remained above the central bank's own forecasts.

See also: Stubborn inflation expected ahead of key RBA rates decision

The quarterly trimmed mean rose 1.0%, compared with the RBA's forecast of 0.8%, while annual trimmed mean inflation lifted to 3.7% from the previous quarter's 3.6%.

Before the data was released, ANZ and Westpac had forecast another rate increase in November, while Commonwealth Bank and NAB expected the cash rate to remain on hold.

All four major banks, however, anticipated quarterly trimmed mean inflation would land between 0.9% and 1.0%, putting today's result broadly in line with expectations.

The figures arrive at a delicate time for the economy. Inflation remains well above the RBA's 2-3% target band, yet economic growth has softened, and unemployment has risen in recent months.

Those competing forces have already been acknowledged by RBA Deputy Governor Andrew Hauser, who recently warned the inflation outlook appeared "materially worse" than expected earlier this year while also recognising signs of weakness in the labour market.

For households, the question is whether inflation is easing quickly enough to convince the Board that September's rate increase was sufficient.

Today's data suggests progress remains frustratingly slow.

While underlying inflation has fallen substantially from its peak, the September quarter result marks another period in which price pressures remained stubbornly above levels consistent with the RBA's target, leaving policymakers with a difficult balancing act when they meet next week.