Australia Q3 inflation data mixed, makes RBA's rate decision next week a close call

Australia’s September quarter consumer price inflation (CPI) data released earlier on Wednesday showed that headline CPI rose by 0.7 percent for the third quarter, beating expectations for an increase of 0.5 percent and was higher than the 0.4 percent level reported in the June quarter.

Meanwhile, underlying inflationary pressures remain soft with the average of the two underlying measures rising by 0.32 percent q/q. In annual terms, core inflation rose by 1.5 percent, slightly weaker than the previous quarter’s 1.6 percent rise. CPI ex-volatiles in seasonally adjusted terms rose a soft 0.3 percent q/q. 

"The RBA would likely be disquieted by the soft tone for underlying inflation. On this data, it is too early to conclude that disinflationary pressures are abating or even stabilising," said ANZ in a report to clients.

Details of the report showed that significant price rises from fruit (+19.5 percent), vegetables (+5.9 percent), electricity (+5.4 percent) and tobacco (+2.3 percent) were partially offset by falls in communication (-2.3 percent) and fuel (-2.9 percent). It is worth noting that factors pushing up inflation in the quarter, including fruit and vegetables, tend to be volatile and transitory. 

Tradable inflation which accounts for 40 percent of the ABS’ CPI basket rose by 1 percent for the quarter. Non-tradable inflation accounting for the remaining 60 percent of the basket rose by a smaller 0.5 percent.

"Today’s data may not be enough of a downside shock for the RBA. Indeed, we note that while very low, inflation is not inconsistent with the RBA’s forecasts published in August. With some hesitation, we continue to expect that the RBA will lower official interest rates by 25 basis points when it meets next week on Tuesday, but admit that it will be a very close call," said St George Economics in a report.

AUD/USD spiked to hit new highs for the week at 0.7709 after upbeat CPI data. The pair, however, failed to hold the 0.77 handle and slipped lower to trade at 0.7670 at around 11:30 GMT. Downside currently finds strong support at 50-DMA (0.76). We see weakness only on break below. Next major hurdle on the upside aligns at 0.7740 (trendline).