Inflation surge puts fifth rate hike in focus

Figures from the Australian Bureau of Statistics (ABS) showed headline inflation jumped to 4.3 per cent in the 12 months to September, up from 4.0 per cent in August.

Despite trimmed mean inflation remaining steady at 3.6 per cent, borrowers are not out of the woods, with another potential rate hike at the Reserve Bank of Australia (RBA) meeting in November.

Similarly to last month, ABS head of price statistics Rachael McCririck said that housing was the largest contributor to annual inflation in September, rising by 5.2 per cent.

“Annual inflation of 5.2 per cent for housing reflected rising costs for both new dwellings and electricity,” McCririck said.

Data showed new dwelling prices rose 4.7 per cent in the 12 months to September as builders passed on higher material and labour costs, but remained down from 5.4 per cent in August.

Transport was the second-largest contributor, rising 8.7 per cent as automotive fuel prices surged over the month.

“On a monthly basis, automotive fuel prices rose 9.4 per cent in September, compared to a rise of 14.8 per cent in August. This was driven by higher world oil prices,” McCririck said.

The figures come less than a week ahead of the RBA November meeting, where the board will decide whether to hike the cash rate for a fifth time this year.

According to Compare the Market economic director David Koch, the stable, trimmed inflation at 3.6 per cent could give borrowers some hope.

“Headline inflation is clearly troubling – and if you look at the driving forces, there are several factors at play. Fuel remains one of the biggest headaches, with the fuel excise relief having rolled off as oil prices surged,” Koch said.

"But if you look at trimmed mean inflation, which strips out some of the more volatile price movements, it’s 3.6 per cent annually.

“At 3.6 per cent, we’re still in a bit of a grey area ahead of the RBA’s November meeting, and the Reserve Bank could decide to watch and wait given the equally concerning rise in unemployment.”

Trimmed mean inflation remains the RBA’s preferred measure of underlying inflation, with the board aiming for a target band of 2 to 3 per cent.

PRD chief economist Dr Diaswati Mardiasmo said a rate rise from 4.6 to 4.85 per cent would signal the RBA’s ongoing concern about inflation, with higher borrowing costs aimed at cooling demand and bringing inflation back within its target range.

She said a fifth rate hike would further erode borrowing capacity, slow buyer demand, moderate price growth, and reduce transaction activity in the housing market.

“The greatest impact is likely to be felt by highly leveraged investors and buyers who rely heavily on debt, as higher finance costs place pressure on cash flow and reduce purchasing power,” Mardiasmo told REB.

“It will be hard, especially for those who bought with a smaller equity upfront, such as first home buyers with only 5 per cent deposit.”

Koch said that while today’s figures did not clarify whether rates would rise or hold, inflation needed to be brought under control without placing further pressure on borrowers.

"The problem is inflation is stuck despite four rate rises. It’s not slowing despite the financial pain inflicted on average Australian households. The challenge is: what can we do to break the impasse? Rate rises haven’t worked so far.

According to modelling, mortgage holders with an average loan of $731,000 are already paying an extra $464 a month after four rate hikes this year.

Another 0.25 percentage point increase would push that figure to $578 a month, adding almost $7,000 to annual repayments.

"Should home owners be the ones to carry the full burden? Right now, it’s the only lever the RBA has, but I think governments at all levels need to start picking up the slack,” Koch said.