Better betting on the Melbourne Cup than a rate cut this year

Jim Chalmers with students at Carlton Primary school. The government is investing $19.3m over five years to establish Partnerships for Local Action and Community Empowerment. Picture: NewsWire / Aaron Francis

Up until quite recently, no one took too much notice of the quarterly release of the CPI. That was until June 2021, when the headline CPI figure came in at 3.8 per cent. It would peak in December 2022 at 7.8 per cent.

We had many years in which the Reserve Bank didn’t manage to achieve inflation within the annual target band of 2-3 per cent – the figure was too low. For the past several years, we have had the opposite problem, and the Australian Bureau of Statistics has even gone to the effort of publishing a monthly CPI figure based on a more limited sample than the quarterly figure.

On the face of it, the quarterly figure released on Wednesday looked to be within the target band – the headline number was 2.8 per cent. The key here is that the RBA focuses on the trimmed mean figure, which excludes irregular and temporary price changes. The annual increase in the trimmed mean was 3.5 per cent, with the quarterly rise coming in at 0.8 per cent, slightly higher than the consensus.

What the headline figure clearly demonstrates is that governments can effectively “buy” a lower number, particularly by offering substantial rebates on electricity bills and providing more rent assistance. Depending on the amount of money offered up, the impact can be substantial.

Without the rebates, it is estimated that electricity prices would have risen by 0.7 per cent. The increase to the Commonwealth Rent Assistance similarly had a large impact on the prices of rents. Excluding the changes to the CRA would have seen rents increase by 8.5 per cent over the year to September 30.

One of the outstanding features of the figures released on Wednesday was the gap between goods inflation that came in at just 1.4 per cent, compared with services inflation, which remains elevated. According to the ABS, “annual services inflation was 4.6 per cent in the September quarter, slightly higher than the June quarter and has remained around 4.5 per cent for the past 12 months. Higher prices for rents, insurance, education and medical, dental and hospital services were the main contributors to services inflation.”

Taking this new data set into account, the most likely decision of the Reserve Bank board next Tuesday, Melbourne Cup Day, will be no change in the cash rate. While there is evidence of disinflation occurring, albeit to a slower timetable than in many other advanced economies, the board is likely to require more evidence that the trimmed mean will reach the target band soon.

Bear in mind here that it is the rate of price increases that is falling, not absolute prices. People can’t expect prices to return to their pre-pandemic levels.

From the government’s self-interested point of view, the best possible outcome now is one or two small reductions in the cash rate of 25 basis points each implemented in the first half of next year. But you wouldn’t necessarily bet on this result, unlike a flutter on the race that stops a nation.