Your 10-second guide to the most important data release in Australia - the inflation report

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Australia’s September quarter consumer price inflation (CPI) report is about to be released.

Arriving just four times a year, it’s arguably the most important data release in Australia, carrying the ability to shift the outlook for interest rates in an instant.

It has in the past, and not all that long ago.

With financial markets looking for the Reserve Bank of Australia (RBA) to lift interest rates next year, this report could see those prospects dashed, or enhanced, as soon as it’s released.

It’s that important.

Here’s the state of play.

  • The CPI report is based off price movements of a set basket of goods and services commonly purchased by metropolitan households.
  • Individual items fall into 11 broader categories, and are weighted based on estimated expenditure by households.
  • In the June quarter, headline inflation rose by 0.2%, leaving it up 1.9% from a year earlier.
  • Underlying inflation — that which strips out volatile price movements and is of more importance when it comes to the outlook for interest rates — increased by 0.53%, leaving it 1.84% higher than a year earlier.
  • That was below the RBA’s 2-3% annual inflation target, continuing the pattern since late 2015.
  • Today, economists expect both headline and underlying inflation to increase from the levels seen in the June quarter.
  • The median forecast is looking for an increase in headline CPI of 0.8%, seeing the year-on-year rate tick up from 1.9% to 2%.
  • The quarterly increase will be partially driven by higher utility prices, especially for gas and electricity, offsetting expected declines in fuel and vegetable prices.
  • Underlying CPI — the average of the ABS’ trimmed mean and weighted median inflation measures — is also expected to edge higher, increasing by 0.5%, leaving the change on a year earlier at 2%.
  • A 2% annual underlying inflation figure would be significant, seeing it return to the bottom of the RBA’s 2-3% inflation target for the first time since the December quarter of 2015.
  • It would also be exactly in the centre of the RBA’s 1.5% to 2.5% underlying inflation forecast range.
  • While the median economist forecast is looking for underlying inflation to rise to 2%, individual forecasts vary significantly. Some, such as Westpac, expect it to undershoot significantly. Others, like TD Securities, think the risks are slanted to the upside.
  • Although most attention in financial markets will be on the underlying CPI figure, the headline CPI rate is also of importance, especially with Australian private sector wages growing at the slowest pace since at least the early 1990s recession. This figure is influential on consumer inflation expectations, an important input for wage negotiations.
  • Should inflation come in hotter-than-expected, especially the underlying measures, it will likely boost the Australian dollar and Australian government bond yields, reflecting the increased likelihood that the RBA may lift interest rates sooner than expected. Of course, if it undershoots, the opposite outcome is likely to be seen.
  • Markets currently see a rate hike from the RBA as an even money bet by the middle of next year. Those odds improve to over 100% by the final quarter of 2018.

The CPI report will be released at 11.30am AEDT.

Business Insider will have all of the details as soon as it hits the screens.

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