Indeed, annual inflation slipped to just 1.8%oya in the year to September (from 1.9% previously), so it remains below the 2-3% target band favoured by the Reserve Bank. In fact, inflation has been below the official target range for all but one (in March 2017) of the last twelve quarters, so the undershoot is persistent.

The quarterly rise in headline inflation in Q3 was 0.6%q/q, a step up from the 0.2% rise in Q2, but below the 0.8% rise economists had expected - most forecasters had pencilled in even larger spikes in energy prices. This is the largest quarterly rise in headline inflation for a year, although the lion’s share of this came from the big rises in wholesale prices for electricity and gas.

The underlying, or core, inflation measures, however, calculated by removing the more volatile items, including energy prices, were weak. The trimmed mean measure, for example, rose only 0.4%q/q in Q3, while the weighted median increased 0.3%q/q. Each of these increases in underlying inflation is the smallest in a year, highlighting how narrowly focussed were the price rises last quarter.

Indeed, the biggest price rise in Q3, unsurprisingly, was for electricity, which bounced nearly 9%q/q. Other prominent prices rises were for tobacco (up 4% owing to the higher excise from 1 September), international travel (also up 4%) and new dwelling construction costs (up 0.8%). There were, however, offsetting price falls for vegetables (down 11%), petrol (down 2.3%) and telco equipment (down 1.5%).

By capital city, the rise in inflation in Q3 was largest in Adelaide, reflecting the larger rise in energy prices (up 21%), followed by Canberra and Sydney. Price gains were smallest in Hobart and Brisbane. Excluding food, inflation rose 0.9%q/q last quarter, the biggest rise since mid-2015, while inflation from domestic sources (eg. energy), at 1.0%q/q, was double that for goods and services influenced by international pricing and the level of AUD.

Today’s lower than expected inflation results should take some heat out the argument that the Reserve Bank was edging closer to delivering the first rise in interest rates. It will be difficult for the Bank to lift rates with inflation still below target, which effectively rules out a move this year – some were speculating at a hike as early as Melbourne Cup day.

The recent improvement in economic conditions, particularly in the labour market, hints that this may be the low point for inflation, but we have been saying that for some time now. A mid-2018 lift in the cash rate still looks most likely in terms of timing but, for that to happen, the improvement in economic conditions will have to have been sustained for long enough for price pressures to have started to build.

Annual inflation