Rapid Response - Australian CPI sees broad-based upward surprise

Australian bond yields have risen after the first full monthly CPI data release delivered a significant upside surprise in the year to the end of October.  The Australian dollar is likely to strengthen as the market is all but ruling out any further rate cuts.

• Annual headline CPI rose by +3.8% to the end of October, according to the ABS today. This was up from +3.2% yoy at the end of September. The market had been expecting an increase of +3.6%.

• The trimmed mean core CPI measure rose by +3.3% yoy, up from +3.0% yoy in September and ahead of the +3.0% yoy consensus forecast.

• The monthly CPI reading was flat in October, compared to +0.3% for the trimmed mean measure.

• Housing was the largest contributor to the rise, which includes electricity prices, as well as rents and new dwellings.

• Annual Housing inflation was +5.9%, up from +5.7% in the year ending September.

• Annual Goods inflation was +3.8% yoy, from +3.7% in the 12 months to September. The main contributor was also electricity. 

• Electricity costs rose +37.1% in the 12 months to October, up from +33.9% to September. The annual rise in electricity costs is primarily related to State Government electricity rebates being used up by households. The timing of the rollout of the Commonwealth Energy Bill Relief Fund (EBRF) rebates also impacted electricity costs.

• Michelle Marquardt, ABS head of prices statistics, said: "Today’s release marks the transition from the quarterly CPI to the complete Monthly CPI as Australia’s primary measure of headline inflation. The time series for the complete Monthly CPI goes back to April 2024, which is when the ABS began collecting prices for a number of Expenditure Classes more frequently."

• S&P/ASX200 8,599 +0.7%, AUDUSD 0.6485 +0.25%, Aus 2yr 3.75% +7bps, Aus 10yr 4.47% +4bps

Fin-X Wealth View

• Like the September quarterly figures, this report focuses on electricity price increases as a significant driver of the highly weighted housing category. There is definitely some distortion since the underlying electricity prices were far more stable once the effects of the subsidies are removed. Nevertheless, that is probably a fair reflection of the inflation that households actually experience.

• The CPI report is prepared from the perspective of consumers. However, like the oil price, the electricity price can have a broad influence since it feeds into every other supply chain.

• The concern for the RBA in this report will be that the price gains were relatively broad-based. Only 4 / 11 categories experienced annual price appreciation that was below the upper limit of the 2%-3% target range.

• Consequently, it will be very challenging for the Board to cut rates until inflation shows signs of returning to target, if at all. Trimmed mean inflation is only -0.3% below the current cash rate of 3.6%.

  

• The 1yr government yield is now above the cash rate at 3.69% and the 2yr yield is now at 3.75%, suggesting that the next move is more likely to be up, and the market has moved to price just a 30% chance of any more cuts, which should support the Australian dollar.

• However, the recent Q3 annual wage increases were just +3.4%, suggesting that consumer incomes are still being squeezed in real terms, and the global economy (including the US) is still slowing. The RBA might not be ready to abandon its easing bias just yet, although any move before February appears extremely unlikely.

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