Australia Q3 Inflation Slows to 3-1/2-Year Low, Core Remains Stubborn

The Australian consumer price index (CPI) rose at a slower pace in the third quarter, falling to its lowest level since early 2021. The headline inflation rate dropped to 2.8% on an annual basis, within the Reserve Bank of Australia's (RBA) 2-3% target band for the first time since late 2021. This slowdown was driven by government rebates on electricity and a drop in gasoline prices. However, core inflation, as measured by the trimmed mean, remained elevated at 3.5% on an annual basis.


The divergence between headline and core inflation can be attributed to several key factors. Firstly, the temporary impact of government rebates and lower gasoline prices contributed to the headline inflation slowdown. Secondly, services inflation, which accounts for a significant portion of the CPI basket, remained elevated despite the overall slowdown. This suggests that underlying inflationary pressures persist in the Australian economy.


The stubborn core inflation has implications for the Australian dollar and bond yields. A higher core inflation rate can lead to expectations of higher future interest rates, which in turn can put downward pressure on the Australian dollar and push up bond yields. This dynamic can make Australian assets less attractive to foreign investors, potentially impacting foreign investment in the country.

In conclusion, the slowdown in Australian inflation in the third quarter was driven by temporary factors, while core inflation remained stubbornly high. This divergence has implications for the RBA's future monetary policy decisions, as well as the Australian dollar and bond yields. As the RBA focuses on core inflation, it will need to consider the underlying inflationary pressures in the economy when making policy decisions.