Inflation figures fall to 2.8 per cent but RBA still unlikely to cut interest rates

Headline inflation has dropped to its lowest level since early 2021, but the news is unlikely to persuade the Reserve Bank to cut interest rates at next week’s board meeting.

Treasurer Jim Chalmers welcomed new figures showing annual headline inflation rose by 2.8 per cent in the year to the September quarter, down from 3.8 per cent in June, as signs “we are on track for a soft landing in our economy”.

He said it showed Labor’s consecutive budget surpluses and targeted cost-of-living measures had made a “meaningful” difference to the core inflation rate.

He noted the “really quite substantial progress” that had also been made in reducing trimmed mean inflation, the RBA’s preferred prices gauge.

The underlying inflation barometer, which strips out volatile items like power bills, climbed 3.5 per cent over the last 12 months - down from 4 per cent the previous quarter.

While it’s still well above the central bank’s target band, Dr Chalmers said the decrease was a “good thing”.

“What we learn from today’s figures is that the Government’s policies are helping take the edge of headline inflation, but underlying inflation has come off substantially as well. That is a good thing,” he said.

“We’ve actually seen underlying inflation moderate for some time now, every quarter, and that is really welcome and encouraging.

“We recognise that people are still under pressure. We do not pretend the fight against inflation has already been won, but we are making considerable progress, and that is welcome.”

Dr Chalmers wouldn’t be drawn on whether or not he expected the latest figures to push the RBA to cut interest rates from 4.35 per cent at next week’s board meeting, saying his job was to “make sure our policies help fight inflation”.

Both ANZ and Westpac predicted the news wouldn’t shift the dial.

If you look under the bonnet the numbers that have come out today ... we see that the weighted mean measure of core inflation is still running at 3.8 per cent, well above what was expected.

“We do not think the decline in trimmed mean inflation will be enough to convince the RBA it should begin the easing cycle this year, particularly as there does not appear to be an urgent need to support the labour market, given its resilience over recent months,” ANZ senior economist Catherine Birch said.

VanEck portfolio manager Cameron McCormack also expected rates to stay on hold.

“Despite today’s announcement indicating inflation has fallen within the target range at 2.8 per cent, the RBA has specified on numerous occasions that it will not be persuaded by temporary measures that artificially lower the headline inflation figure,” Mr McCormack said.

“In this case, the Government’s energy rebates. The preferred inflation measure, the trimmed mean, remains stubbornly high at 3.5 per cent.”

The RBA had been anticipating headline inflation to fall back within target in the second half of the year, but forecast the decline to be short-lived because of the nature of temporary cost-of-living measures.

The central bank expects CPI to pick back up late next year, when the state and federal government energy rebates end.

Shadow treasurer Angus Taylor said the drop in headline inflation wouldn’t “hoodwink” the RBA, or the Australian public, pointing the finger at temporary subsidies that were already predicted to push CPI below three per cent.

“If you look under the bonnet the numbers that have come out today ... we see that the weighted mean measure of core inflation is still running at 3.8 per cent, well above what was expected,” he said.

“The homegrown inflation, the non-tradeable inflation, is running at over four per cent, almost seven times what the imported inflation level is. And that tells us that we’ve still got a sustained and persistent inflation problem.”