Headline Inflation Cools, But Core Pressures Keep RBA on Guard

With a November monthly CPI flat at 0.0% m/m, Australia indicated no net change in headline prices between October and November. Coming in less than market expectations of about 3.6–3.7%, headline inflation on an annual basis dropped to 3.4% y/y from 3.8%. Weak results in some commodity sectors, as well as base effects, significantly dragged down the annual rate.

Still sticky under the surface, though, core inflation is present. With the annual rate just slipping to 3.2% y/y from 3.3%, the RBA's preferred underlying measure, the trimmed mean CPI, increased 0.3% m/m for a second straight month. While labour-intensive services are keeping basic pricing pressures high and clearly over the RBA's 2–3% target band, housing, food, and transportation keep helping to moderate inflation.

While not yet opening the door to early cuts, markets saw the release as lowering the near-term danger of more rate increases. Initially falling on the softer headline surprise, the AUD then rose as traders turned their attention to the still-firm core. Australian stocks gained with rate-sensitive industries supported as expectations consolidated that the RBA will likely leave the cash rate untouched in the near term and wait for more convincing evidence that underlying inflation is consistently returning within the target band.