The worrying trend that could put an end to rate cuts
In the shock inflation pressure that scared the Federal Reserve from lowering interest rates at its last meeting, two items were of particular concern to Governor Michele Bullock.
After the central bank kept the cash rate steady at 3.6 per cent on Tuesday, Ms Bullock said the rise in inflation was temporary and did not rule out further rate cuts if price growth continued its downward trend.
However, increases in new housing prices and prices for services such as dentistry and takeaway meals suggest that inflation may be more robust than previously feared.
This could pave the way for further rate cuts.
As it stands, Ms Bullock thinks September’s big jump was largely “temporary”, driven by one-off factors such as the rise in council rates and international travel, and will not be repeated.
“We’re going to look at the data now, and if that doesn’t appear to be happening, then we’re going to have to re-examine our predictions and our thinking about how much of this is temporary and how much of it is not,” he told reporters after the meeting.
Belinda Allen, Commonwealth Bank’s head of Australian economics, said the inflation increase in September was due to strong consumer demand rather than temporary factors.
“Market services and new home construction costs are generally more persistent compared to other categories,” he said.
In the RBA’s Monetary Policy Statement published alongside the cash rate decision, bank staff said reduced discounts and higher base prices had contributed to the increase in the cost of new homes.
Buoyed by low interest rates and rising real wages, buyers flocked to the real estate market again.
“Housebuilders’ removal of rebates may be a one-off,” RBA staff wrote.
“However, this may continue alongside the ongoing strength in the housing market.”
Strong services inflation may also reflect that the economy is heating up in a way that makes it harder for the RBA to get it back under control.
Prices of services are more influenced by wages and therefore reflect more domestic inflationary pressures.
“The quarterly inflation rate rose across a number of components, particularly for dining out and takeaway food, which may partly reflect difficulty finding staff and rising costs on some food inputs,” the Central Bank said.
Australia’s dismal productivity growth in recent years has fueled rising labor costs.
The RBA expects productivity growth to increase as pressure eases on unit labor costs for businesses.
But another result that falls short of forecasts for productivity could mean it will take longer to get inflation under control than the RBA had predicted.
As Ms. Bullock made clear, the board will be monitoring incoming data closely and all options, including a rate hike, are on the table.
“If inflation remains high in 2026 and does not fall quarterly, the RBA may need to take action,” Ms Allen said.
Australia’s Associated Press is the beating heart of Australian news. AAP is Australia’s only independent national news channel and has been providing accurate, reliable and fast-paced news content to the media industry, government and corporate sector for 85 years. We inform Australia.
