Back in July, the June inflation figures killed off chances of a rate rise; yesterday, however, the September inflation figures all but guarantee a rate rise next week.
The September figures are a bit quirky because the Bureau of Statistics published both the monthly and old quarterly ones.
The monthly measure had annual inflation jumping up from 4.0% to 4.3%; while the quarterly measure – which the RBA has in the past said was more important – remained steady at 3.9% (and if anything fell very slightly):
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But that did not matter: all focus was on the 4.3% number, even though monthly figures are much more erratic and subject to jumps and falls in certain prices.
In September, as was the case in July and August, petrol prices were the big driver. Automotive fuel rose 9.4% in the month. They also look set to rise another 7% when the October figures come out next month:
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It means that around half of the increase in inflation in September came from fuel prices. This was followed by holiday costs, which always go up at the start of spring:
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The impact of petrol prices over the past three months is, of course, all driven by oil prices oddly refusing to react to either the RBA raising rates or Donald Trump declaring mission accomplished in Iran:
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The impact of petrol prices since June on overall inflation is obvious when you look at inflation with and without those prices. Without petrol prices, inflation would be at 3.6% – well below the 4.3% official rate:
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And yes, 3.6% is higher than the Reserve Bank would like, but it does perhaps give an indicator of what we are dealing with here.
Inflation isn’t galloping ahead due to domestic pressures; rather, it is remaining higher than the RBA’s target due to the flow through of oil prices into costs (including holidays) and directly in fuel prices.
We are also seeing the impact of AI datacentres on inflation.
As with last month, once again the price of games increased. That’s because we are not talking about board games, but those which require computer chips – the same type that are in such high demand for datacentres.
The ABS noted that the 15.5% price rise for games, toys and hobbies in the past year was “driven by price increases in memory and storage components being passed on to consumers”.
So that’s nice: enjoy paying more for Grand Theft Auto VI.
But look, anything I tell you here isn’t going to make a lick of difference. The RBA is going to raise rates next week.
Before the CPI release, the odds were about 61%. Afterwards they rose to 87% and a rise to 4.85% is fully priced in to happen in December:
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What is interesting, though, is it makes it clear just how much more the RBA cares about inflation than its other mandate of full employment.
When the September unemployment figures of 4.7% were released, the market quite rightly dropped the likelihood of a rate rise to a less than one in five chance. But the RBA was clearly not happy with that.
Last week, the deputy governor of the RBA, Andrew Hauser, participated in a fireside chat to Citigroup investors. He made it clear the RBA was not happy with things, saying “the inflation outlook looks materially worse than we projected in the August report”.
He further said that there is “an increasing share of businesses who are thinking that maybe 3% to 3.5% is the new normal … that is the central banker’s nightmare”.
And boom, the odds of a rate rise increased from 22% to 51%, and they kept going up.
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That means the RBA can now easily justify raising the rate next week – after all, they primed the market to do so.
Hauser yesterday walked back his comments somewhat when the RBA appeared before the Senate estimates committee. He said that it was surprising “how well anchored inflation expectations remain”.
And as for the increases in unemployment? That is rather less of a concern for the RBA.
Greens senator Nick McKim asked Michele Bullock whether she was “worried … about the pace of the increase in unemployment, specifically what rise in unemployment would give the RBA cause for a reasonable concern that we would head into recession?”.
He asked this due to unemployment rising from 4.1% in January to 4.7% in September. Claudia Sahm, a US economist, argues a 0.5% rise in the three-month average of unemployment over a year is the point at which an economy enters recession conditions.
Right now, Australia’s three-month average unemployment rate has risen 0.45% in the past year, and if the October rate remains at 4.7%, it will break through the 0.5% mark:
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Bullock replied: “We’re not worried about the pace of increase in the unemployment rate at this stage. We do forecast that it has to gradually move up … I can’t be specific about what that number is. What I can say is we think that it’s probably above where the unemployment rate is at the moment.”
So that’s nice. Sleep well knowing that Australia’s unemployment rate is rising but the central bank will increase rates again, knowing it might send it up even higher.
Greg Jericho is a Guardian columnist and chief economist at the Australia Institute
