'All but guaranteed': bowser price shock raises rate hike fears

A 7.2 per cent jump in the cost of filling up the car, a 2.2 per cent rise in rents, a 4.2 per cent jump in electricity charges and 2.8 per cent higher insurance premiums contributed to a 1.2 per cent increase in headline inflation in the three months to the end of September, after climbing a more moderate 0.8 per cent in the previous quarter, the Australian Bureau of Statistics reported.

Disruptions in the global oil market from production cuts and fears of escalating regional conflict have been exacerbated by the weaker Australian dollar, which has declined from almost US69 cents to US63.5 cents in the past three months.

The growth in headline inflation decelerated to 5.4 per cent, its weakest pace since the March quarter last year and much slower than the 7.8 per cent growth rate reached late last year.

The result adds further confirmation that inflation pressures are easing in the economy and the government and the Reserve Bank of Australia expects annual growth in the consumer price index to fall below 3 per cent by late 2025.

But the current surge in global oil prices has stoked worries that price pressures will stay higher for longer. This would likely cause significant concern for the RBA, which warned earlier this month that it had "low tolerance" for any further delay in bringing inflation down.

Reserve Bank governor Michele Bullock warned on Tuesday that the central bank "will not hesitate to raise the cash rate further if there is a material upward revision to the outlook for inflation".

Treasurer Jim Chalmers said the September quarter inflation figures were in line with the government's expectations.

"It doesn't materially change...Treasury's expectations for when inflation will return to the [2 to 3 per cent] target band," the treasurer said.

Dr Chalmers admitted the slowdown in inflation could be "a bit bumpy" in coming quarters because of the uncertain global environment but said he expected it to continue to moderate.

"The escalating conflict in the Middle East risks putting upward pressure on global oil and, therefore, petrol. But nothing in [these] figures change the way that we expect inflation to moderate in coming months and years," he said.

Before the release of the inflation figures market economists thought there was about a 50 per cent chance of an increase in the official cash rate next month.

But several warned the risks of a November 7 rate hike to 4.35 per cent had increased, with one describing it as a near certainty.

EY chief economist Cherelle Murphy said na rate hike on Melbourne Cup Day "looks all but guaranteed".

Ms Murphy said the unexpectedly strong inflation increase, combined with higher fuel prices and the weaker Australian dollar "mean inflation is now out of line with the Reserve Bank's August forecasts. The bank's job isn't done yet".

ANZ head of Australian economics Adam Boyton said the "uncomfortably high" inflation reading would convince the Reserve Bank of Australia to resume tightening monetary policy after leaving it on hold for the past four months.

Some tip interest rates could go even higher. Deutsche Bank chief economist Phil O'Donaghoe thinks a November rate rise will be followed by another hike in December to lift the official cash rate to 4.6 per cent.

But Deloitte Access Economics partner Stephen Smith questioned the need for tighter monetary policy.

Mr Smith said the inflation result was driven largely by external factors that did not justify a rate rise.

"None of the excessive price growth appears to be driven by strong household spending or an over-hearted economy," he said. "Combined with the fact that the full impact of earlier rate rises is still to be felt, there remains little justification to increase interest rates."

The ABS figures show the cost of essentials like fuel, food, housing, health and utility bills surged 1.4 per cent last quarter, pushing the annual increase to 5.5 per cent, overshadowing a 0.8 per cent rise in the cost of discretionary items like alcohol, tobacco and eating out.

But, in a more promising outcome, annual services inflation slowed for the first time since late 2021 and grocery price growth has moderated significantly, including a sharp 6 per cent drop in the cost of fruit and vegetables.

Dr Chalmers said the inflation report showed government assistance was helping contain the increase in living costs.

According to the ABS, electricity prices would have gone up by 18.6 per cent instead of 4.2 per cent without the government's energy price measures, while child care costs - which fell 13.2 per cent - would have risen 6.7 per cent.

The treasurer said the government's $23 billion package of measures was taking "some of the edge off these inflationary pressures without adding to inflation in the economy".

But he ruled out cutting the fuel excise to help relieve prices at the bowser, saying "it's not something that we've been focused on".

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The ABS figures show annual services inflation has slowed from 6.3 per cent in the June quarter to 5.8 per cent last quarter. Housing remains a major cause of higher services costs. Rents grew at an annual rate of 7.6 per cent, the biggest such increase since 2009.

Opposition treasury spokesman Angus Taylor accused the government of being "distracted by other things" from tackling inflation.

"You've got to deal with the source of the problem, not the symptoms, and you can't leave all the work to the Reserve Bank," Mr Taylor said. "We need a government that is treating this as its first, second and third priority."

He said the government needed to focus on "a sustained fiscal balance", improving productivity and reducing taxes.