Headline inflation eased in the September quarter to a 0.6% rise (from 0.9% in the June quarter) with the annual rate of growth down to 3.5% rate, from the 3.6% in the June quarter. The measures of underlying inflation, the trimmed mean and weighted median, did much better than the headline rate, with both rising by just 0.3% each in the quarter. That produced an annual rate of 2.45%, safely inside the 2% to 3% inflation range that is the RBA’s target over time.

This is the first number from a new CPI series — the ABS has overhauled its measures to take into account changes to household expenditure. It’s also dumped out the volatile deposit and loan facilities index from the headline rate.

The biggest rises in the September quarter were for utility prices, courtesy of a round of electricity and water price rises in July. If you took those rises out, the headline rate would have been significantly flatter. And in fact, that’s exactly what the ABS has done, courtesy of a new inflation measure, the seasonally adjusted all-groups. In smoothing out the utility price rises and other seasonal variables, it rose 0.4% in the quarter and 3.5% over the year. Food prices, and health costs, actually fell.

So the one thing we can definitely say is that there is no chance of Australia joining India where the central bank lifted interest rates on Tuesday for a 13th time in 19 months. But beyond that is less certain than a lot of analysts will insist — the markets and the pundits are now certain there’ll be a cut next week.

Yes, Australia is now firmly on the side of the “doves” in central banks: those whose monetary policy outlook is tilting towards an easing in rates. Brazil has led the way by cutting rates twice. Israel sat on rates this week, as did Thailand last week, but both are looking to cut rates in the not too distant future. The Reserve Bank of New Zealand meets tomorrow morning and won’t reverse its 0.5% cut from earlier in the year to help the economy absorb the impact of the two massive earthquakes in Christchurch. Australia’s last rate increase was a year ago next month, when the cash rate was lifted 0.25% to 4.75%. And, all up, we’ve seen an easing in those price pressures in the quarter that were worrying the RBA from April through August, when only the financial crisis in Europe and worries about the US stayed the RBA’s hand on a rise.

That’s where the chances of a rate cut continue to lie — not domestically, where there’s no evidence of an economy needing monetary stimulus. The flow of economic data since the October RBA board meeting has been better than expected, a point acknowledged in a speech in Sydney yesterday by RBA deputy governor Ric Battellino. There’s no part of the economy that threatens to drag the wider domestic economy lower, as the export sector did earlier in the year after the bad floods in Queensland, which slashed coal production and exports and delivered a “supply” shock to growth. Consumption remains solid and domestic demand isn’t as weak as some megaphones in retailing and punditry would have us believe. Retail sales are firming slowly, car sales are very solid, as is overseas travel, while inbound tourism hasn’t slumped as some in the sector claim. Manufacturing remains a black spot, but that’s due more to the impact of the higher dollar. Exports are solid; fears about China continue, but the data from there has picked up a touch in the past two weeks.

No, the threat is from offshore: the minutes for the past three RBA board meetings have shown a rapid escalation in the level of concern at the central bank about the strains flowing from Europe’s inability to control the crisis and bring about a lasting and convincing solution that wins over sceptical investors and markets. Europe, and not the Australian economy, dominated the minutes of the October board meeting and produced a noticeable softening in attitude from the central bank. So if the RBA does cut next week, it’ll be because the Europeans have signalled their unwillingness — inability, more likely — to resolve the most serious problems facing the global economy currently.

And, barring a dramatic breakthrough in the next 12 hours, there doesn’t seem to be any chance of an agreement soon in Europe. There’s talk of a new meeting of eurozone finance ministers this weekend to get one nailed down. Some reports, however, claim the next meeting of finance ministers won’t happen to November 7. If financial markets tank and there is a massive loss of confidence in Europe in the next five days, then a rate cut will be very much on the cards on Melbourne Cup day (appropriate given there’s are a fleet of European horses that could win the cup, and few local nags with a chance).

And if things get really hairy in response to the ongoing European debacle, a cut in December might come into play as well.

Peter Fray

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