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The ABS has just released its September quarter inflation report, and it’s come in below expectations.

Over the quarter headline inflation rose by 0.5%, with the annual rate remaining unchanged at 1.5%. Markets were looking for an increase by 0.7%, leaving the annual rate at 1.7%.

Tradable inflation, price changes for goods and services largely determined by offshore factors, rose by 0.3% over the quarter, slightly outpaced by a 0.4% increase in non-tradable inflation.

The most significant price increases during the quarter were in international holiday travel and accommodation (+4.6%), fruit (+8.2%) and property rates and charges (+4.6%). These were partially offset by falls in vegetables (–5.9%), telecommunication equipment and services (-2.0%) and automotive fuel (–1.7%).

The table below reveals the quarterly and annual change in prices for the various components that make up the ABS’ CPI basket.

As was the case with the headline rate, core inflation, that which is far more crucial in terms of the outlook for Australian interest rates, also came in softer, rising just 0.3% over the quarter.

The figure was well below the 0.5% increase expected and left the annual rate at just 2.15%, towards the bottom end of the RBA’s 2-3% inflation target band. It also marked the slowest annual increase in the core rate since the June quarter of 2012.

The below forecast core inflation reading has seen expectations for an interest rate cut surge, taking the odds for a 25 basis point reduction from the RBA on November 3 to more than 50%.

Reflective of the increased likelihood that the cash rate could move to a record-low level of just 1.75% next week, the Australian dollar has been smoked in the minutes following the CPI release.

The AUD/USD currently trades at .7123, a decline of 0.92% for the session.

AUDUSD (Mt4, Go MArkets)

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