Inflation up but no rate hike likely in November

Inflation kicked higher in the September quarter but not to a level which would demand a rate hike by RBA governor Michele Bullock and her board on Melbourne Cup day.

The Reserve Bank will almost certainly leave its official interest rate unchanged at its Cup Day meeting in two weeks.

Yes, inflation kicked up in the September quarter. But not to a level which would demand an immediate rate rise.

Indeed, even the ‘higher’ 1.2 per cent quarterly increase was only 4.8 per cent on an annualised basis.

I say ‘only’, because that’s lower than the 6 per cent figure for the June year and indeed the 5.4 per cent figure for the September year itself.

We are finally ‘washing out’ from the yearly data the big – near 8 per cent annualised – quarterly inflation numbers recorded in the second half of 2022.

And this will deliver another drop, to below 5 per cent, in the annual inflation number for this year to December.

Now, yes again, new governor Michele Bullock has been – entirely appropriately and sensibly – talking tough on inflation.

The minutes from her first policy meeting as governor reported a “low tolerance” for inflation taking longer to get back to (the 2-3 per cent) target than currently expected.

Bullock took it a step further in her first speech Tuesday, by stating the board “would not hesitate” to hike if inflation looked like rising.

So, it has risen – from 0.8 per cent in the June quarter to 1.2 per cent in this latest September quarter?

So, doesn’t that mean a rate hike? On Cup Day?

No. For a series of reasons.

RBA governor Michele Bullock at the Commonwealth Bank of Australia Global Markets Conference in Sydney. Picture: NCA NewsWire / Dylan Coker

This was almost all about petrol, and some gas; with oil prices rising on OPEC and Russian production cuts.

That, happening in the September quarter, then fed into the – ongoing and we don’t know where it will go – Hamas terror attack on Israel.

Bullock indicated concern this would all boost inflation. but, she’s also concerned about its impact on global growth.

Again, and simply, the impact on current and prospective inflation is not yet threatening enough to demand that immediate Cup Day rate hike. Especially into all the uncertainty – both global and domestic.

It can sensibly – arguably, even necessarily - be left for the December and even more next February’s meeting.

The last RBA predictions were compiled at the start of August, before both the full impact of rising oil prices was apparent and also, obviously before Hamas launched its attack.

The RBA projected inflation of around 1.9 per cent over this December half.

That would deliver a sharp drop in annual inflation to just 4.1 per cent for the whole of 2023 – on its slow, sticky, path to 3.3 per cent by December 2024 and then below 3 per cent in mid-2025.

Again, this 1.2 per cent quarterly rise does not seriously, far less immediately, threaten that broad path.

Even if inflation ran at 1 per cent in the December quarter – it would leave the year’s inflation at still just 4.5 per cent.

That would still be comfortably on that lower trend – the “narrow path” of previous governor Philip Lowe and now also Bullock – after a 6 per cent June year inflation rate and 2022’s 7.8 per cent.