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Inflation advances in September: How will this affect interest rates in November?

Peter Terlato avatar
Peter Terlato
- 4 min read
Inflation advances in September: How will this affect interest rates in November?

Inflation in Australia remains persistent, increasing the likelihood of further rate hikes.

The Consumer Price Index (CPI) rose 1.2% over the September quarter, contributing to a continued rise in annual inflation. The Australian Bureau of Statistics’ (ABS) quarterly CPI indicator rose 5.4% in the year to September 2023. 

The biggest contributors to September's quarterly increase were automotive fuel (+7.2%), electricity (+4.2%), rents (+2.2%) and new dwellings purchased by owner occupiers (+1.3%). Inflation was tempered by price falls in child care (-13.2%) and fruit and vegetables (-3.7%).

“CPI rose 1.2 percent in the September quarter, higher than the 0.8 percent rise in the June 2023 quarter. The rise this quarter, however, continued to be lower than those seen throughout 2022,” ABS head of prices statistics Michelle Marquardt said.

Monthly data changes course

Although the pace of annual inflation has slowed somewhat since the June quarter (6.0%), the monthly CPI indicator recorded a marked rise in September (5.6%). This is the second consecutive monthly hike in consumer prices, following a jump in August (5.2%). Prior to this, the monthly series had been consistently trending downward for four months.

However, It’s important to note that volatile price movements can distort the monthly CPI data drops. Volatile items include fruit and vegetables, automotive fuel, and holiday travel and accommodation. It can be helpful to exclude these items from the headline CPI indicator to provide a more accurate view of underlying inflation.

Excluding volatile items, the monthly CPI results were more stable at 5.5% in both August and September.

How will this affect interest rates?

The Reserve Bank of Australia (RBA) has lifted the cash rate 12 times over the last 17 months - taking it to 4.10%, the highest it’s been in 11 years.

In October, the RBA left the cash rate on hold for the fourth consecutive month. For some time now three of the four big banks have been advocating that the cash rate had officially peaked, signalling no further cash rate hikes in the short term. Only NAB continued to forecast one further rate hike late in the year.

Following the release of the latest inflation figures, CBA and ANZ have joined NAB in predicting that a cash rate hike is likely to occur in November. Despite this, CBA still suggests that cuts to the cash rate could begin as early as May 2024. However, this guidance is continually subject to change.

Australia's unemployment rate fell slightly (-0.1%) in September to 3.6% and inflation may be, again, gathering pace. While the level of inflation is obviously a significant influence on the decision-making policy, there are a number of other key economic factors that the Board considers when determining the cash rate.

For example, the conflict unfolding in Gaza and Israel is already causing global economic disruptions, particularly with regards to oil prices, instigating the largest quarterly rise in fuel prices since March 2022, according to the ABS.

New RBA boss talks tough on stubborn inflation

In a speech at the Commonwealth Bank Global Markets Conference in Sydney this week, Reserve Bank governor Michele Bullock warned Australians that there might be a need for another interest rate bump to tackle sticky, rising inflation, according to the ABC.

“It is possible that this can be done with the cash rate at its current level, but there are risks that could see inflation return to target more slowly than currently forecast,” Bullock said.

“The board will not hesitate to raise the cash rate further if there is a material upward revision to the outlook for inflation. At the same time, the board is mindful that growth in demand and the rate of inflation have been moderating, and that there are long lags in the transmission of monetary policy.” 

Bullock acknowledged that around a quarter of households with variable mortgages and rising debt are struggling financially, and that mortgage pain will likely linger as not all of the previous interest rate hikes have been passed on, in full, to borrowers.

Australia, like most of the rest of the world, seems destined to encounter some form of economic hardship and a spell of weak growth. While there is much debate over whether or not Australia will enter into a recession, it may be more prudent to question the extent to which this forecast slump in economic activity will affect consumer confidence and household debt, and for how long?

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This article was reviewed by Personal Finance Editor Alex Ritchie before it was published as part of RateCity's Fact Check process.