Australian inflation rises to 4.3% and the trimmed mean beats the RBA’s forecast, which strengthens the case for a November rise.

The news

Inflation rose to 4.3% in the year to September, slightly above the 4.2% expected. The trimmed mean, the Reserve Bank’s preferred measure, rose 1.0% over the quarter. That was in line with most bank forecasts but above the Bank’s own forecast of 0.8%. Underlying inflation is running hotter than the Bank planned for, which makes a fifth rise on 3 November easier to justify. That leans the Aussie dollar higher into the decision. Conviction is moderate: the core number matched what most forecasters expected, so this adds to the case for a rise rather than changing it.

What these numbers are

CPI: the change in prices of the everyday goods and services households buy.

Trimmed mean: the same measure after setting aside the items with the biggest price rises and falls. It shows the underlying trend, and it is the number the Bank sets rates on.

The quarterly trimmed mean: the figure the Bank measures against its own forecasts. In August it expected 0.8% for the September quarter.

Why the Aussie could go up from here

Core is ahead of the Bank’s forecast. The trimmed mean rose 1.0% against the Bank’s 0.8%. Deputy Governor Andrew Hauser had already said the outlook was materially worse than the August forecasts, and this number supports him.

Underlying inflation is moving away from target. The annual trimmed mean rose to 3.6% from 3.5%. That is above the 2–3% target, and it is heading the wrong way.

The rise is wider than petrol. Housing rose 5.2% over the year and services 4.1%. Fuel’s jump was big enough to be cut out of the trimmed mean, so the 1.0% is coming from everything else.

The cash rate is 4.60% after four rises this year. Another rise would make the Aussie more attractive to hold.

The weak spot

The trimmed mean was not a surprise. CBA, NAB and ANZ all expected 1.0%, and CBA forecast exactly this number while still expecting the Bank to hold. Much of the headline jump comes from fuel, up 23.6% over the year, and from electricity, up 12.8% as government rebates ended. The Bank tends to look through both. Unemployment is also at a five-year high of 4.7%, which gives the Bank a reason to wait.

How to trade it

Chart first. If the Aussie is already stretched to an extreme on the 4-hour chart, there is no trade.

The reaction trade: long the Aussie a day or two after the release, only on a chart trigger (a divergence, a low taken out, or a change of character followed by a break of structure). Close it before the RBA decision on 3 November.

What comes next

3 November: RBA decision, with updated forecasts.

LEDGER · AUD +1