Tim Hext: Inflation is easing, but the RBA isn’t celebrating yet

While August inflation data shows inflation has eased, more progress is required before we’ll see rate cuts in Australia, writes Pendal’s head of government bond strategies TIM HEXT

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A SHARP fall in headline inflation was reported today, in the latest monthly CPI series for August.

Prices since August last year are only 2.7% higher and are back in the RBA’s target band of 2-3% for the first time since a 3% reading in October 2021.

Market forecasters did a great job in a volatile series, as 2.7% was spot on expectations.

Though encouraged, the RBA will not be celebrating yet.

Massive government subsidies, largely on electricity, are the main reason headline inflation is falling fast.

Electricity prices, accounting for the subsidies, fell 14.5% in August and are now 20% lower in Q3. They make up only 2.4% of the CPI weight, but 20% on 2.4% still impacts CPI by 0.5%.

Trimmed mean (underlying) inflation, which cuts out the highest and lowest-weighted 15% of price moves, is still at 3.4%.

This is the RBA’s main focus, and the central bank would need to be convinced that this will be sustainably at, or very near, 3% to begin cutting rates.

Our initial forecast for underlying inflation for Q3 is 0.7% (headline will be near flat). This annualises at 2.8%.

However, the RBA would likely need to see Q4 at a similar level, though if unemployment were to rise enough in October and/or November, it could tip the balance.

We don’t get Q4 CPI numbers till late January, which makes the current market forecast of an 80% chance of one rate cut by year-end optimistic.

Source: Bloomberg

Another inflation-friendly factor during August was falling fuel prices. These fell 3% in August and are 7.6% lower than a year ago.

Pump prices are lower again in September, though a recent bounce in crude oil prices should see what we pay go up again in early October.

In terms of the higher inflation sectors of recent times, there were no major moves.

Rents were up 0.6% on the month again and still look locked into around 6-7% annual growth.

Insurance prices were up 2.8% for the quarter and remain near double-digit annual growth.

Service inflation (around two-thirds of the CPI) is at 4.2% – still too high – but with wage growth topping out at 4% and likely to ease back, the RBA should be getting a bit more comfortable.

About Tim Hext and Pendal’s Income & Fixed Interest boutique

Tim Hext is a Pendal portfolio manager and head of government bond strategies in our Income and Fixed Interest team.

Tim has extensive experience in banking, financial markets and funding including senior positions with NSW Treasury Corporation (TCorp), Westpac Treasury, Commonwealth Bank of Australia, Deutsche Bank, Bain & Co and Swiss Bank Corporation.

Pendal’s Income and Fixed Interest boutique is one of the most experienced and well-regarded fixed income teams in Australia.

The team won Lonsec’s Active Fixed Income Fund of the Year award in 2021 and Zenith’s Australian Fixed Interest award in 2020.

Find out more about Pendal’s fixed interest strategies here

About Pendal

Pendal is a global investment management business focused on delivering superior investment returns for our clients through active management.

In 2023, Pendal became part of Perpetual Limited (ASX:PPT), bringing together two of Australia’s most respected active asset management brands to create a global leader in multi-boutique asset management with autonomous, world-class investment capabilities and a growing leadership position in ESG.

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