Inflation at 32-year high
Inflation topped expectations, increasing by 1.8 per cent in Q3, following on from a similar increase in the June quarter.
Over the year, consumer price inflation increased to 7.3 per cent.
The trimmed mean figure came in hotter than expected at 1.8 per cent for the quarter (albeit the weighted median figure of 1.4 per cent wasn't quite so bad).
Overall, then, underlying inflation picked up to 5½ per cent over the year, which wasn't far off the expected figure.
The trimmed mean figure was 6.1 per cent, and that figure does attract more attention these days.
Drivers of inflation
Inflation has largely been imported and driven by global supply issues - which are now improving - rather than being domestically generated.
This was reflected in tradables inflation rising to 8.7 per cent over the year to September.
James Foster shows that more than three-quarters of inflation has been driven by the price of goods and pandemic-related factors, rather than inflation in services, in this clever graph.
The main contributions this quarter came from the tail end of the HomeBuilder stimulus pumping up the price of new dwellings (which will fall going forward as demand for new housing softens dramatically), gas, and furniture.
Food prices also jumped, following the brutal weather damage to crops.
Rental price inflation is also now increasing, as expected.
The ABS series is bound to lag asking rents, which are up by more than 20 per cent over the past year.
CoreLogic's data series for September shows that actual unit rents are soaring as immigration returns with a vengeance.
Unit rents increased 1.1 per cent in the month of September, and are now recording double-digit annual gains in the three most populous capital cities, plus Adelaide.
Source: CoreLogic
Unit vacancy rates also continue to plunge to record lows, at just 1.1 per cent nationally.
Source: CoreLogic
This is helping to underpin unit prices, while house prices are being squeezed lower by reduced borrowing capacity.
With massive immigration to ramp up over the next two years, this trend towards rising unit rents appears likely to continue.
Meanwhile prospective investors are finding it increasingly difficult to deliver a rental supply response, with a 300 basis points lending assessment buffer making it impossible for many to borrow.
The wrap
There was the usual initial consternation as headline inflation came in above expectations.
It's worth pointing out, though, that the Reserve Bank has already aggressively lifted interest rates by 250 basis points, between May and October, and of course none of that tightening is reflected in the inflation figures over the June and September quarters.
A more sober analysis suggests that the core inflation rate won't be too much different by the end of the year than had been previously expected by the Reserve Bank.
The monthly inflation data also shows that inflation has stabilised (at a high level), while the most timely indicators such as business surveys and activity gauges all suggest that price pressures are now easing.
Having shifted down to 25 basis point increments, monetary policy is likely to continue with further tightening in 25 basis point moves, rather than panicking, according to market expectations.
Australia's 3-year bond yield is now trading at under 3½ per cent, some way below the 3.8 per cent we saw not so long ago.
