Australia's inflation data hides a housing cost glimmer even as rate rise looms

HouGarden Australia, 30 October — This report covers Australian inflation data and Reserve Bank of Australia monetary policy. It has no direct bearing on New Zealand's market or the Reserve Bank of New Zealand.

The Australian Bureau of Statistics released its monthly consumer price index on Wednesday, showing headline inflation — the broadest measure of price rises across the economy — rose to 4.3 per cent in the 12 months to September. That is the highest reading since March and came in above economists' forecasts.

The trimmed mean, which strips out the most volatile price movements and is the measure the Reserve Bank of Australia watches most closely as its gauge of underlying inflation, rose to 3.6 per cent. Both figures remain well above the RBA's 2–3 per cent target band.

Markets now expect the RBA to lift the cash rate to 4.85 per cent at its board meeting on Tuesday. That is a market expectation, not a decision the central bank has yet announced.

The rate rise, if it proceeds, would add further pressure on Australian mortgage holders already under strain from multiple previous increases. But Commonwealth Bank of Australia senior economist Trent Saunders said the data contained one clear positive: housing inflation is slowing.

Annual inflation in the housing sector eased from 5.4 per cent to 4.7 per cent over the period. Saunders said discounts and promotions offered by developers in response to weaker demand for new homes helped offset the upward pressure builders face from rising labour and materials costs. 'While we have been expecting new dwelling costs to slow due to weaker conditions in the established housing market, this pace of the slowdown exceeded our expectations,' he said.

AMP economists Diana Mousina and My Bui said housing — which makes up roughly one-fifth of the consumer price index basket — provided the only encouraging signal in an otherwise difficult set of figures. 'The only silver lining actually comes from housing,' they wrote.

Monthly rents rose 0.2 per cent in September, below the 0.3–0.4 per cent pace recorded in the previous four months, the ABS data showed. New dwelling prices were unchanged in September, down from a 0.2 per cent rise in August and earlier readings of between 0.4 and 0.9 per cent.

House prices across Australia have been falling since mid-year, following the RBA's first three rate rises and changes to negative gearing and capital gains tax rules announced in the Australian federal budget — both policies specific to Australia's tax and property framework.

Mousina and Bui argued that the housing sector's responsiveness to economic conditions means it can act as a leading indicator for broader inflation. 'Housing inflation tends to respond quickly to economic conditions and can lead broader inflation readings, which should help inflation to moderate from here,' they said.

Saunders pointed to further tentative positives elsewhere in the data. Monthly market services inflation slowed from 0.7 per cent in July to 0.4 per cent in August and 0.2 per cent in September, while prices fell in several key goods categories. 'This suggests that some of the unusually strong price increases earlier in the quarter are beginning to ease,' he said.

He was careful, however, to stress that improvement so far was not enough to shift the underlying inflation trend. 'The improvement has so far been too small to materially lower underlying inflation momentum,' Saunders said, citing continued pressure on input costs, the removal of card payment surcharges from 1 October, and higher fuel prices as ongoing pain points.

He also flagged a risk that the modest improvement visible in parts of the September data might translate into only a gradual further easing in underlying inflation over the December quarter.

For New Zealand readers, Australia's inflation trajectory offers indirect context: if the RBA continues tightening while the Reserve Bank of New Zealand navigates its own cycle, cross-Tasman rate divergence can influence investment sentiment and capital flows in both directions, though the two economies are responding to distinct domestic conditions.