Australia’s inflation stubbornly high in October, closing door for rate cuts

[SYDNEY] Australian consumer prices rose for a fourth straight month in October, a new monthly report showed on Wednesday, reinforcing the case that the central bank’s policy easing cycle could be over.

The Australian dollar edged 0.2 per cent higher to US$0.6480, while three-year government bond futures dropped 7 ticks to 96.17. Investors pared bets that the Reserve Bank of Australia will be able to deliver one last rate cut in May next year to 24 per cent, from 40 per cent before.

Data from the Australian Bureau of Statistics showed its monthly consumer price index (CPI) in October rose 3.8 per cent from a year earlier, above median forecasts of 3.6 per cent. That marked a steady pick-up from the trough in June when inflation hit a low of 1.9 per cent.

The trimmed mean measure of core inflation ran at an annual 3.3 per cent in October, up from 3.2 per cent in September, also not going in the RBA’s desired direction.

“All up, it’s a pretty ugly inflation print,” said Harry Murphy Cruise, head of economic research for Oxford Economics Australia.

“For the RBA, this keeps cuts off the table. In fact, a hike can’t be ruled out.”

This is the first complete monthly CPI report published by ABS, replacing the old and partial monthly series. However, the RBA has said it still prefers the quarterly prints for a better gauge of inflation trends given the new data can be volatile.

Headline inflation surged in the last quarter to 3.2 per cent, back above the target band of 2-3 per cent, fuelling concerns that monetary policy might not be restrictive after three rate cuts this year. Home loans jumped and the consumer mood turned optimistic for the first time in four years.

Details of the report suggested the pick-up in inflation has been broad based, with price pressures in the services sector accelerating. Services inflation ran at an annual rate of 3.9 per cent last month, up from 3.5 per cent in September.

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Housing inflation advanced to 5.9 per cent in the 12 months to October, from 5.7 per cent before, even though the government’s electricity rebates have flowed through to some households and brought the costs down for the month.

“The RBA now find itself in the unenviable position of being caught between needing to support economic growth while getting inflation back within the 2-3 per cent band. That tricky balancing act is a central banker’s nightmare,” said Stephen Smith, Deloitte Access Economics partner.

“The good news is that the new and improved monthly CPI series provides the RBA with a more frequent measure of price pressures across the economy compared to the old quarterly print, reducing the potential for a monetary policy misstep.” REUTERS