Inflation returns to RBA’s preferred range for first time since pandemic

For the first time in three-and-a-half years, inflation has returned to the Reserve Bank of Australia’s (RBA) target band of 2 to 3 per cent.

The consumer price index fell to 2.8 per cent annually, after rising just 0.2 per cent in the September quarter, according to Australian Bureau of Statistics (ABS) data released Wednesday (30 October).

Michelle Marquardt, ABS head of Prices Statistics, said the September quarter’s rise of 0.2 per cent was the lowest outcome since the June 2020 quarter fall, which occurred during the Covid outbreak and was driven by free childcare.

“Annually, the September quarter’s rise of 2.8 per cent was down from 3.8 per cent in the June quarter. This is the lowest annual inflation rate since the March 2021 quarter,” Ms Marquardt said.

In December 2022 inflation was at 7.8 per cent and interest rates soaring, but these latest figures will embolden calls for the RBA, and subsequently banks, to cut interest rates.

Economists do not expect an interest rate cut until at least February, while bond markets are fully priced for the RBA to cut the cash rate to 4.1 per cent around May 2025.

While the headlines will raise a chorus of voices demanding an interest rate cut, other remain less convinced of that viability – not least the RBA.

RBA Governor Michele Bullock has made it clear her Board will be watching their preferred measure of underlying inflation, the trimmed mean. This reading fell to 3.5 per cent in September, a 2.5-year low, but still comfortably above the central bank’s 2 per cent to 3 per cent inflation target band.

The RBA expects inflation to jump back to 3.7 per cent late next year when the state and federal government energy rebates expire. They have ruled out a near-term reduction in the current 4.35 per cent official cash rate.

CBA on Wednesday also pushed back its forecast for the timing of the first cash rate cut from December of this year to February 2025, following the release of the inflation figures.

The economic team at Australia’s biggest bank now also expects a total of four cuts by the end of 2025, rather than five as previously forecast.

As a result, all four big banks now expect the first cut will be in February 2025 with the total number of cuts ranging from three to five.

The latest result is the seventh quarter in a row of lower annual trimmed mean inflation, down from the peak of 6.8 per cent in the December 2022 quarter.

Rents rose 1.6 per cent for the quarter and 6.7 per cent annually, down from the annual increase of 7.3 per cent in the June quarter. The other significant quarterly price rises were recreation and culture, up 1.3 per cent, food and non-alcoholic beverages, up 0.6 per cent, and alcohol and tobacco, up 1.3 per cent.

The ABS will also release data on September retail trade and household spending later this week.

Housing costs weigh heavily on CPI

Housing costs are a major component of the inflation figure. Over the past year, rents are up by 6.7 per cent while the cost of new dwelling purchase is 4.8 per cent higher, well above the wider inflation rate.

Master Builders Australia (MBA) has warned temporary energy relief and rent assistance measures are masking systemic housing inflationary issues.

Denita Wawn, CEO, MBA, said housing costs continue to put upward pressure on the inflation rate and are prolonging the pain being felt by families.

“Increasing the supply of new homes, including rental accommodation, is crucial.

“A number of barriers continue to hamstring the industry’s ability to speed up the delivery of new homes, including high building costs, labour shortages, CFMEU disruption and pattern EBAs (enterprise bargaining agreements), and planning delays.

“Meaningful action to address supply-side barriers in the housing market is not happening fast enough.”

Even if an interest rate cut is not immediately forthcoming, the latest ABS data has at least pushed the prospect of a rate rise into the background.

Real Estate Institute of Australia (REIA) President, Leanne Pilkington, said the falling CPI figure and global direction of inflation and interest rates meant borrowers could reasonably expect that the RBA’s next move will be down and not up as feared.

“Retail and household spending numbers will provide further pointers on consumer behaviour before next week’s RBA Board meeting and be assessed with the RBA’s twin objectives of not only taming inflation but also achieving full employment.

“While the September unemployment rate remained unchanged due to increased employment it needs to be remembered that about 70 per cent of new jobs in the past year have been in non-market or public jobs and don’t reflect market conditions and underlying economic demand.”

“Against this background and a consistent downward trend in inflation, borrowers may anticipate that a rate cut cannot be far away,” concluded Ms Pilkington.

Andrew Canobi, Director of Franklin Templeton Fixed Income, was less convinced.

“The inflation number all but kills whatever glimmer of hope remained of a 2024 rate cut.

“The headline is artificially low through electricity subsidies of course and while the underlying trimmed mean is inching closer to target, it isn’t close enough to the RBA’s target; services inflation was actually a bit stronger at 4.6 per cent year-on-year.

“The still solid labour market is also telling the RBA there’s no reason to rush into a rate cut,” Mr Canobi said.

Property market defying loan stress

While interest rates remain stubbornly high and are testing the financial resolve of millions of borrowers, solid growth in sales and mortgage activity in the three months to 30 September 2024 shows momentum still continues to build in the national property market.

The latest PEXA Property and Mortgage Insights report shows Australia’s mainland states saw an 11.1 per cent increase in property settlement volume and a 19.8 per cent increase in value over three months. There were 183,288 settlements with a total value of $178.3 billion in the September quarter.

Queensland again recorded the highest number of residential settlements, while Brisbane maintained its position as Australia’s second most expensive capital city, behind Sydney.

Across the mainland states, all capital cities and regional areas experienced near double-digit growth compared to the September 2023 quarter, with the exception of regional Victoria. Regional WA reported standout growth, with residential volumes surging by 19.5 per cent.

In NSW, the top 10 postcodes for residential settlements were all within Greater Sydney, with areas such as Marsden Park and Oran Park in Sydney’s west continuing to attract significant interest due to their large-scale greenfield housing developments. So too in Victoria, with outer Melbourne Craigieburn and Tarneit performing strongly, while in Queensland the top postcodes were predominantly located on the coast. In South Australia the outer Adelaide suburbs of Munno Para West and Andrews Farm topped the list, followed by Mount Barker in the Adelaide Hills.

In mortgage trends, the number of home loans issued increased by 16.2 per cent to a total of 137,186, with more than 96 per cent of these loans for residential property.

PEXA Group’s Chief Economist, Julie Toth, said the reports show that demand for new housing continues to outstrip supply, resulting in an increase in more buyers seeking existing properties and prices, with strong growth in both capital cities and regional areas.

“Growth in new housing supply – including housing and apartments – has continued to lag behind growth in demand for new housing nationally in most locations,” Ms Toth said.

“New homes are taking longer and costing more to build than in the past. High labour and material costs have added to the rising price of new builds. These capacity constraints are pushing more buyers into the market for existing home and pushing home prices higher.”

Ms Toth said strong population growth and low household sizes also continued to support strong underlying demand for housing. In terms of mortgage trends, Ms Toth said consumer sentiment was tentatively improving in response to better conditions, but debt-related sentiment remained highly cautious.