Stubborn inflation expected ahead of key RBA rates decision

The September quarter Consumer Price Index (CPI), due from the ABS on Wednesday, is expected to show underlying inflation remaining uncomfortably above the RBA's 2%-3% target band. 

Commonwealth Bank, NAB and ANZ are all forecasting policy-relevant quarterly trimmed mean of 1.0%, while Westpac expects a slightly softer 0.9% outcome. 

Annual underlying inflation is expected to remain around 3.5%-3.6% in the September quarter. 

Headline inflation is seen to accelerate around 1.2%-1.3% in the quarter, leaving the annual rate at 3.9%.

Big Four September quarter CPI forecasts

If realised, this would be the fifth consecutive quarter that trimmed mean inflation landed between 0.8% and 1.0%.

This would also exceed the RBA's forecast of 0.8% quarterly trimmed mean. 

The CPI data will come less than a week before the RBA board meets on Melbourne Cup Day to decide whether to keep rates on hold or tighten policy again.

ANZ said a 1.0% quarterly trimmed mean outcome would reinforce its forecast for a follow-up rate hike to the 25 bps increase the Board delivered in September. 

Meanwhile, CBA said the decision would depend heavily on "the outcome and composition" of next week's CPI print. 

Fuel prices in focus

A sharp rise in petrol prices is expected to be one of the quarter's biggest inflation drivers. 

Westpac forecasts transport costs to increase 2% in September, driven by a 8.3% increase in automotive fuel prices following higher oil prices through the month.

The bank recently upgraded its near-term inflation forecasts after fuel prices surged more than expected.

"Auto fuel surged ahead of our expectations so along with signs of increase pass-through we lifted our December quarter CPI," Westpac economists said, adding inflation momentum remained "meaningfully above the RBA's current expectations".

CBA and NAB also anticipate fuel prices to maintain their upward trend, rising by around 9.5%-9.8% in September after a 14.8% increase in August. 

Similar to Westpac, both big banks expect fuel-related inflation pressures to persist into the December quarter, "given a further increase in fuel prices in October and the continued pressure on refined prices, particularly diesel".

"With prices having been rising through the quarter and refined product prices remaining elevated, fuel looks set to add to inflation again in Q4," NAB senior economist Taylor Nugent added.

While the trimmed mean excludes volatile items such as fuel, economists warn higher petrol prices can still feed into broader inflation through increased transport and operating costs that businesses pass on to consumers.

Housing to remain a source of inflation pressure

Despite signs of gradual moderation, housing is still expected to be a significant source of inflation pressure. 

"The current housing market downturn is likely to mean we continue to see disinflation," ANZ economist Madeline Dunk said.

See also: All capital cities record price falls for first time in 15 years

"Growth in new dwelling purchases by owner occupiers has been trending lower after a strong H1 when builders passed on surcharges due to higher material costs," Ms Dunk added. 

CBA agrees, noting weak demand and softening conditions in the established housing market will start to limit builders' ability to pass higher costs through to buyers.

However, major bank economists still expect housing inflation to pick up off the back of a seasonal rise in council rates and charges.

Meanwhile, rental inflation is expected to cool in the September quarter, gradually easing from recent highs.

CBA, NAB and ANZ all expect rents to rise 0.2% in September, while Westpac forecasts a slightly stronger 0.3% increase. 

Temporary relief is also expected from the latest biannual indexation of Commonwealth Rent Assistance, which is likely to weigh on measured rent inflation in the September and October readings.

See also: What is rent assistance and who is eligible for it?

However, some economists say underlying rental pressures remain elevated, with CBA's Mr Saunders noting rent growth excluding the CRA effect remains firm amid low vacancy rates and tight rental conditions.

All eyes on CPI before the RBA Board meets in November

September quarter CPI is widely expected to be the most important piece of domestic data before the RBA's November meeting.

Despite forecasting another strong inflation result, the major banks remain divided on the RBA's next move.

ANZ and Westpac both have a rate hike in November as their base case. 

Their two counterparts, on the other hand, continue to forecast rates will remain on hold in November, though CBA has recently acknowledged the risk of another hike has increased.

The stakes were raised this week after RBA Deputy Governor Andrew Hauser said the inflation outlook appeared "materially worse" than policymakers had projected in August.

Deputy Governor Hauser noted the Board is in a world of "hard choices" and reiterated that upside risks feared in August had crystallised. 

He also acknowledged the recent easing in the labour market and subdued consumption growth. 

Australia's unemployment rate jumped to a post-COVID high of 4.7% in September after more than 39,000 fell out of work. 

CBA noted the Deputy Governor's remarks suggested the Board is seeing a difficult trade‑off between responding to inflation pressures and avoiding further weakness in activity and employment.

"While he acknowledged the downside risks to employment and economic activity, overall the comments were inflation focused," Mr Saunders noted. 

CBA expects the RBA to keep rates on hold in the coming months.

"[However] risks are firmly tilted to the upside and much will depend on the CPI and the Governor's appearance before the Senate, both on Wednesday next week," Mr Saunders said.