Cat's out of the bag? Inflation spikes, stoking RBA hike fears
- The inflation read of 3.8% for October was much higher than anticipated with a trimmed mean result of 3.3%
- Both are well outside the RBA's target band of 2-3% and add to inflation pressures that started mounting in September
- Economists say this means the cash rate will stay on hold for an extended period
- The RBA next decides the cash rate on 8-9 December
The October inflation data has exceeded market expectations although, on a monthly basis, headline inflation remained flat.
The largest contributors to the annual figure were housing (+5.9%), food and non-alcoholic beverages (+3.2%), and recreation and culture (+3.2%).
The latest numbers may add some confusion to the market as the October monthly data is the first to include a full CPI, including a trimmed mean inflation reading.
This came in at 3.3% in the 12 months to October, up from 3.2% the previous month.
Services inflation bounds ahead
Once again, annual services inflation came in higher at 3.9%, up from 3.5% the previous month.
This was fuelled by rises in rents (+4.2%), medical and hospital services (+5.1%), and domestic holiday travel and accommodation (+7.1%).
Goods inflation rose only modestly in October at 3.8%, up from 3.7% previously.
The main contributor to goods inflation over the past year has been electricity, recording a price increase of 37.1%.
This is largely due to both federal and state government rebates rolling off.
The inflation conundrum is also increasingly home grown, with non-tradables up 4.7%, while tradables are up a more modest 2.2%.
What does the CPI mean for interest rates?
The latest data follows another surprise jump in inflation over the September quarter, with those figures released late last month.
They saw the annual inflation reading push higher to 3.2% - outside the Reserve Bank of Australia's 2-3% target band for the first time in a year.
Trimmed mean inflation, the RBA's preferred measure, also jumped to 3%, well above market and RBA expectations.
The September data effectively scuppered the prospect of further cuts to the 3.6% cash rate for the foreseeable future.
The October data, released on Wednesday, will likely fuel expectations that the next movement to the cash rate may be higher in a bid to dampen rekindled inflationary pressures in the economy.
These are being driven by a relatively tight jobs market and rising wages growth off the back of stubbornly poor productivity hampering the supply side of the economy.
See also: Employment and wage statistics in Australia
NAB economists said the RBA will still prefer to consider the next quarterly figure, due to be released in January 2026.
The RBA is expecting 0.75% quarterly growth, while NAB expects 0.8%.
Over the month, October has contributed 0.3% in price growth, meaning the index is on track to exceed both of these forecasts.
CBA senior economist Trent Saunders says this means the RBA will stay on hold for an extended period:
"We do not hear from the RBA until the December meeting. But the clear risk is a switch to a more hawkish tone. Alternatively the RBA Board could maintain a straight bat given the uncertainty over how to read the new monthly data series."
- Trent Saunders, CBA senior economist.
How has the CPI data changed?
The October CPI is the first release of a full monthly CPI, replacing the old system of a monthly indicator and a full quarterly CPI.
The monthly indicator was previously quite volatile as it excluded around a third of measured products in the ABS's 'basket of goods'.
It also means the monthly data will now include a 'trimmed mean' figure.
This is a reading that excludes volatile and seasonal items that record the highest and lowest price swings.
The RBA and economists agree this 'underlying' reading is the most reliable indicator of inflation although its monthly release will be under assessment for some time.
Mr Saunders said the October CPI was always going to be closely watched.
"Not just for the inflation read, but for how well the new monthly framework performs," he said.
"There [was] more uncertainty than usual in the estimates and we expected a wide range of forecasts across the market."
The Reserve Bank has already indicated it will stick with its preferred quarterly reading of underlying inflation while assessing the reliability of the monthly read.
The next meeting of the Reserve Bank's monetary policy board is set to take place from 8-9 December with no expectation of a pre-Christmas cut to the cash rate.
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