Today, the Australian Bureau of Statistics' (ABS) latest release revealed that inflation rose by 0.8% this quarter, bringing it to an annualised rate of 3%.
Last quarter's inflation spiked to an annualised rate of 3.8%, which was attributed to childcare subsidies winding back.
This means that inflation is now within the Reserve Bank of Australia's (RBA) target range of 2-3% to potentially trigger a rate rise.
However, RBA Governor Dr Philip Lowe has repeatedly maintained that the Reserve Bank will not raise the cash rate until inflation and wage growth is 'sustainably' in the 2-3% band, which it does not forecast happening until 2023 or 2024.
Annual trimmed mean inflation also hit 2.1%, up from 1.6% last quarter - this number excludes one-off price impacts such as free childcare.
This should give the Reserve Bank "plenty to think about" according to APAC economist at Indeed Callam Pickering.
"Core inflation is now well above the August Reserve Bank forecasts, which should lead to an upgrade of their inflation forecasts in November," Mr Pickering said.
"Whether it stays within the RBA’s 2-3% target band will depend in large part on whether a tighter labour market pushes wage growth higher."
"In September, the increase in core inflation essentially matched the increase in headline inflation, which means that growth was more widespread than earlier in the year.
"Right now, it seems probable that economic conditions will justify a raise in the cash rate earlier than the RBA’s 2024 projection."
The Reserve Bank's next cash rate decision comes next week on Melbourne Cup day - Tuesday 2 November.
The September quarter's inflation data is largely in line with predictions from economists ahead of the highly-anticipated data released today.
Commonwealth Bank economists correctly forecast that inflation would rise by 0.8 percentage points, bringing the Consumer Price Index (CPI) to 3% for the September quarter.
CBA economists forecasted the trimmed mean CPI to rise to 1.8%, and that underlying inflation would rise modestly to 2.5% in 2023.
Notably, these predictions are broadly in line with the RBA's forecast that trimmed mean inflation would reach 1.75% this quarter.
ANZ economists expected CPI to come in at 3.1%, closely aligned with CBA economists' forecasts.
However, ANZ economists point out that the market is pricing that the cash rate will rise 'much earlier' than the RBA is signaling, and that while disagreements aren't uncommon, the extent of it is 'larger than typical'.
ANZ economists predict that the RBA's 10 basis points yield target for 2024, but that "questions around its future will remain".
What influenced inflation this quarter?
Notably, the cost of automotive fuel reached a record high this quarter due to higher global oil prices amid economic recovery and supply disruptions.
"Fuel prices continued to increase, rising by 7.1% in the September quarter, to surpass its previous high from 2014," Mr Pickering said.
High construction activity coupled with supply and material shortages has led to the sharpest new dwelling value increase since 2000 (when GST was first introduced).
With fewer government grants provided this quarter, government housing construction grants had a lower impact on inflation.
'Strong' demand and supply disruptions also caused pressure to be placed on the cost of durable goods, such as furniture and motor vehicles, since the start of COVID-19.
Additionally, the 'two speed' rental market saw prices drop across Sydney and Melbourne but rise across all other capital cities.
This comes as CoreLogic's latest release revealed that national rents have risen at the fastest annual rate in 13 years.
The cost to buy fruit fell this quarter as there have been plentiful supplies of avocados, citrus, and berries, leading to lower prices for consumers.
"Global supply chain issues will remain a thorn in the side of Australian businesses in the near-term. Some businesses will be able to absorb those higher prices but increasingly you’d expect that to be passed on to consumers," Mr Pickering said.
What does it all mean?
This rise in inflation data means a few meaningful things for Australian consumers.
Firstly, it means that the cost of goods and services has gone up.
CPI measures the change in price for a fixed basket of goods and services commonly purchased by people around Australia.
The fixed basket is determined based on actual household expenditure data.
Secondly, and what many economists are currently whispering about, is that it can influence the RBA's cash rate.
The cash rate has been held at its record-low of 0.10% for almost a year now, and is likely to remain that way for the next couple years.
However, CBA and ANZ economists have predicted that the cash rate will rise well before the RBA's 2024 deadline.
When the cash rate increases, so will interest rates offered to Australian consumers, however banks have begun increasing home loan rates out of lockstep with RBA decisions.
All four big banks (CBA, ANZ, Westpac, and NAB) have recently hiked their fixed home loan interest rates, with the most recent interest rate increase from NAB Wednesday morning.
Image by Martin Sanchez on Unsplash
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