After raising interest rates at its November meeting, the RBA did not have enough information at its December meeting to justify any bold moves. A decrease in monthly inflation for October was encouraging and the large increase in the quarterly Wage Price Index (WPI) for September was expected. However, the RBA has its eye on services inflation and there was no recent data to react to: around 33% of the monthly inflation indicator by weighting is made up of services data that is only measured quarterly or less - this data is thus estimated each month.

What the RBA said

“The limited information received on the domestic economy since the November meeting has been broadly in line with expectations. The monthly CPI indicator for October suggested that inflation is continuing to moderate, driven by the goods sector; the inflation update did not, however, provide much more information on services inflation.”

“There are still significant uncertainties around the outlook. While there have been encouraging signs on goods inflation abroad, services price inflation has remained persistent and the same could occur in Australia.”

“Wages growth picked up in the September quarter but this was expected given that it captured the earlier Fair Work Commission decision on award wages.”

Statement by Michele Bullock, Governor: Monetary Policy Decision, 5 December 2023.

https://www.rba.gov.au/media-releases/2023/mr-23-35.html

What to expect next

Monthly Inflation is back on track

After increases in inflation in August (5.2%) and September (5.6%) on a yearly basis, inflation fell to 4.9% in October (see chart below).

The largest decreases on an annual basis were in clothing and footwear (-0.1% to -1.5%), electricity (18% to 10.1%), and automotive fuel (19.7% to 8.6%). Automotive fuel decreased -2.9% on a monthly basis. Automotive fuel has been jumping around over the last six months (see chart below), and while it has had a big impact on monthly inflation, the RBA would not be too concerned with this volatile item, which is beyond its ability to control.

But what is going to happen with service inflation?

The RBA, however, is concerned about service inflation. This is because service inflation is proving stickier than goods inflation. Further, many other advanced economies are also struggling with services inflation. Unfortunately, only a third of the service categories by weight are measured on a monthly basis so the RBA has to wait until 31 January when the December quarterly inflation figures are released before it can get a good gauge on services inflation.

However, the services that are included in the monthly inflation indicator are pointing in the right direction. For example, the price of new dwellings and rent are now both trending down (see chart below). Together, these two items comprise around 14% of the weighting for the monthly inflation indicator.

For some other service categories, we can get a sneak-peak of how they are trending by looking at the retail turnover and household spending data. If consumers are spending more on services then this will provide fuel for inflation while if they are spending less, this should help services inflation to fall.

Retail turnover decreased from 2% in September to 1.2% in October on an annual basis (seasonally adjusted). In terms of services, turnover from cafes, restaurants, and takeaway food seems to be finally levelling out after its near-constant rise from the middle of the pandemic (i.e. from when the initial pandemic restrictions were lifted)(see chart below).

Similarly, when we look at the service categories in the monthly household spending indicator for October, we see spending on recreation and culture is now negative on an annual basis while transport; and hotels, cafes, and restaurants have decreased compared to the previous two months (see chart below).

Taken together, this extra data suggests that service inflation should be on its way down. If this is true and it continues, we may have seen the last interest rate rise by the RBA in this cycle.

Wages spike but RBA not concerned

The Wage Price Index increased by 1.3% for the September quarter, which is the highest-ever quarterly increase in its 26-year history. However, the main driver of this was the increase in the minimum wage taking effect in July rather than a general increase in wages.

Impact on the Australian Private Debt Market

While inflation is not falling as fast as it is in the US, inflation in Australia is trending the right way and the RBA is doing its best to ensure a soft landing while remaining vigilant against inflation. Investors in Australian private debt can continue to enjoy high floating rates and a strong Australian economy.