Australia inflation gauge benign in Sept, no bar to rate cut

SYDNEY: A private gauge of Australian inflation edged up modestly in September while measures of core inflation stayed benign, suggesting price pressures alone would not be an obstacle to a cut in interest rates this week.

The Reserve Bank of Australia (RBA) holds its monthly policy meeting on Tuesday and markets are pricing in a two-in-three chance that the 3.5 percent cash rate will be cut by a quarter point, in part because inflation remains subdued.

The TD Securities-Melbourne Institute's measure of consumer prices rose 0.2 percent in September, from August when it increased by 0.6 percent.

The annual pace of inflation picked up to 2.4 percent, from 2.2 percent in August, but remains comfortably within the RBA's long-term target band of 2 to 3 percent.

Annette Beacher, head of Asia-Pacific Research at TD, said the gauge suggested the official measure of consumer prices (CPI) rose by a tame 1.4 percent in the year to September, while underlying inflation ticked up only slightly to an annual 2.1 percent.

Still, the official data are not out until October 24 and it was possible the RBA would wait for confirmation on inflation before considering an easing.

"Tomorrow's RBA meeting will be a close call, but on balance we think the cash rate will be left unchanged," said Beacher. "We believe waiting for another monthly data suite is prudent."

Indeed, the majority of analysts in a Reuters poll doubt the RBA will cut this week, though almost all do expect a move by Christmas.

"Our base case remains a 25 basis-point rate cut in November, with 50 basis points as a risk case," said Beacher.

"The RBA may voice a clear easing bias tomorrow along the lines of: "the low inflation outlook allows for lower cash rates should that prove to be necessary".

Monday's data showed price increases for petrol, fruit and vegetables, domestic holiday travel and accommodation in September. Prices for fruit and vegetables rose by 6.3 percent in the month, on top of a sizable gain in August.

These were partly offset by price falls for rents, footwear, and audio, visual and computing equipment and services.

Excluding petrol, fruit and vegetables, the inflation gauge was unchanged in September, to be up 2.4 percent for the year.

The trimmed mean of the gauge, which strips out the biggest rises and falls in any month, edged up by 0.1 percent in September, after a 0.6 percent rise in August. The annual pace inched up to 2.3 percent, from 2.2 percent the month before.