Inflation shock: prices on the way up

CPI data reduces chance of rate cut on Melbourne Cup day

Mike King

Mike King is a Fool.com.au Investment Analyst and Writer. He caught the investing bug more than a decade ago, at a time when the U.S. had invaded Iraq and fear reigned in the markets. His initial success as the markets took off encouraged his passion and thirst for knowledge. With 13 years behind him at one of Australia's largest domestic banks, Mike's passion for stocks led him to join a boutique funds management firm, where he stayed for four years. A seven-year stint in equity research at one of the largest investment banks in the world followed that, giving Mike a thirst to pursue his passion further. Mike holds a Diploma in Applied Finance and Investment and a Graduate Certificate in Financial Planning. His passion is to help retail investors invest better, and that passion was one of his primary reasons for joining The Motley Fool Australia in late 2011. Mike has written thousands of articles since joining, including for Fairfax Media, Yahoo!7, Ninemsn and has also appeared on ABC's The Business. You can see all of Mikes' holdings here

Published October 24, 2012 1:12 pm AEDT

Don't expect a rate cut next month. That's not a prediction by the way.

Here at the Motley Fool, we've learnt our lesson and have given up predicting what the Reserve Bank of Australia (RBA) will do with interest rates.

But the chances of the RBA cutting rates looks very slim, after the Consumer Price Index (CPI) for the September quarter came in well above the numbers expected by most economists. Inflation rose 1.4% in the three months, with the most significant price rises in electricity (up 15.3%) thanks mainly to the carbon tax, while international holiday travel and accommodation (up 6.6%) – most likely due to a slight fall in the Australian dollar. Medical and hospital services were also up 4.5%.

Core inflation, the number the RBA looks at when deciding on interest rates, was 2.5% in the year to September, smack bang in the middle of the central bank's target band of 2-3%.

The S&P / ASX 200 (Index: ^AXJO) (ASX: AXJO) has risen 12% since the beginning of June, and consumer sentiment appears to be improving. With house prices appearing to have hit bottom, further rate cuts may be unlikely.

Wesfarmers Limited (ASX: WES) chief Richard Goyder, last week told a business luncheon that consumer sentiment was showing green shoots, thanks to a lack of bad news and the September cut in official interest rates.

The number of home loans rose higher than expected in August, compared to a fall in July, which should be good news for our banks including Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Corporation (ASX: WBC) and Australia and New Zealand Banking Group (ASX: ANZ).

Property sales also appear to be rising with the Real Estate Institute of Victoria reporting a 62% auction clearance rate for Melbourne, while Sydney clearance rates are running at around 63%, according to Australian Property Monitors.

The Foolish bottom line

Futures markets had priced in a 80% chance of a rate cut next month, but after the CPI figures were released, that dropped to 65%. Should the RBA decide not to cut rates next month, that would ruin Governor Glenn Stevens perfect record of cutting interest rates every Melbourne Cup, since appointed to the top job.

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Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. The Motley Fool's purpose is to help the world invest, better. Take Stock is The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it's still available. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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