Inflation comes in higher than expected – will we get one more rate rise?

Posted by Gavin Chau

With Melbourne Cup Day next week, we usually bring a dish connected to our ethnicity to work. I can’t decide between a classic tapioca pearl and coconut cream-based Cantonese dessert called sai mai lo or just some crispy pork belly with hoisin dipping sauce. There aren’t many Chinese dishes that taste good after they’ve cooled down, so I’m stuck.

Anyway…. What’s happening in the world of money?

While we are busy participating in these festive rituals, the RBA will meet live to decide on interest rates. Although inflation for the September quarter fell to 5.4%, the September monthly inflation rose slightly from 5.2% to 5.6%. Keep in mind that it was never going to be a smooth line back to 2%. It’s probably important to distinguish the difference between the monthly and quarterly inflation measures. Between 62 and 73% of the weighting of the total CPI basket will be included in the monthly CPI figure compared to 100% for the quarterly data. As such, the quarterly data is the key inflation metric by which the RBA makes decisions, and inflation has been falling much faster than the RBA predicted. Nevertheless, the increase in the monthly data won’t be ignored.

Let’s have a closer look.

Between August and September, the monthly inflation rate rose 1.2%. Of this, 0.25% was due to increased fuel prices (19.7%). Let’s look at the other big drivers contributing to inflation: electricity (18%), rent (7.6%), and construction prices (4.9%). These are supply-side issues that can’t really be influenced directly by interest rates. Conversely, in the case of rent, the high interest rates (in conjunction with the unprecedented immigration intake) are actually contributing to inflation by disincentivising new housing supply from coming online. Keep in mind new housing starts fell off a cliff already last quarter.

If we were to look at retail sales, they’re likely still down in Q3. Measured yearly, they’re probably -2.1%; measured per capita, they’re around -5%. If it were not for the huge spike in population growth, sales would be a lot weaker than the numbers indicate.

however, this didn’t stop the big four banks from unanimously predicting another rate rise next month, bringing the cash rate to 4.35%. None of them see any further rate rises after this. In contrast, the bond market had a slightly different view, predicting a 43% chance of a rate rise next month. This dropped as low as 31% as Michele Bullock gave her speech. One thing we have to keep in mind is that we often give more weight to a big institution’s predictions than to smaller players. In February 2022 (when the cash rate was still at 0.1%) most were saying we wouldn’t get a rate rise till late in the year or 2024. They were also the ones to say that predicted a 30% drop in housing prices just before they jumped 30% in 2021. Short-term predictions are notoriously difficult.

Are we going to get another interest rate rise next month, then?

I honestly don’t know. I know that if you look at the data, there isn’t any good reason to continue raising rates, given that we still haven’t felt the full effect of the previous interest rate increases. In addition, rate rises will not affect the goods and services experiencing the highest inflation now. But just because there isn’t any good reason to raise rates doesn’t mean we won’t get one. I’ll go out on a limb and say the RBA will probably pause but either way, it really does nothing to the overall market structure. When the bull market concludes, we won’t even remember this.

Posted by Gavin Chau, on 31st Oct 2023