RBA Monitor: Sticky inflation justifying status quo in November with data dependency

Inflation has surprised on the upside in Australia with the headline CPI jumping to +3.2% YoY in Q3-25. More importantly, the trimmed mean, a preferred measure of underlying inflation by RBA, picked up from +2.7% YoY in Q2-25 to +3.0% YoY in Q3-25 (Chart 1), which is well above the Reserve Bank’s forecast of +2.6% YoY on the August Statement on Monetary Policy. Moreover, service inflation remained sticky, expanding from +3.3% YoY to +3.5% YoY.These developments could possibly reflect stabilizing economic growth. GDP surprised on the upside by +0.6% QoQ in Q2-25, where private consumption made the largest positive contribution by expanding +0.9% QoQ. Stronger consumer demand could have encouraged companies to pass on higher costs to their customers.However, the sustainability of this positive momentum is questionable, as real disposable income has stagnated over the past few years. In fact, household expenditures have slowed from +5.6% YoY in July to +3.5% YoY in August, as consumer sentiment deteriorates.Moreover, the labor market continued to soften. While employment growth slowed from +1.5% YoY in August to +1.3% YoY in September, the unemployment rate jumped from 4.3% to 4.5% (Chart 2), which is above the RBA’s forecast of 4.3%. This trend is unlikely to reverse in the coming months, as the sustainability of the economic recovery remains uncertain.All in all, the RBA is expected to keep the cash rate on hold at 3.6% in November, largely due to sticky inflation in Q3-25. In fact, Governor Bullock said in September that if inflation doesn’t soften, “we will have to be thinking about what’s the appropriate stance of policy.” Nevertheless, softening labor market and a stronger Aussie are expected to contain inflation, as the Fed continues to ease. For these reasons, the RBA is anticipated to emphasize data dependency to ensure inflation stabilization.