The Australian dollar is higher this morning after third quarter inflation data showed that consumer prices rose a higher-than-expected 0.7% in the three months to September.
The annual headline rate still printed a very low 1.3% rate, well below the RBA’s 2-3% target band, but forex traders are clearly betting the big rise in quarterly inflation takes any chance of another RBA rate cut off the table.
Complicating factors for the Aussie dollar however could be the print in underlying inflation which rose just 0.35% on the quarter leaving the inflation rate at a tepid 1.55%.
But while economists focus is away from the headline number because of the impact of volatile items like food and fuel RBA governor Lowe signaled in a recent speech that headline inflation is important because it feeds back into personal consumption and investment behaviours.
Lowe went further noting that “with headline inflation rates so low, many workers have agreed to smaller wage increases than would have otherwise been the case, especially where expectations of future inflation are also low. The low wage increases have in turn reinforced the low inflation outcomes”.
So observed inflation, headline inflation, matters to people and that matters to the RBA.
It also matters to foreign exchange markets insofar as it impacts expectations about any further RBA rate cuts.
A short time ago the AUD/USD was trading at 0.7702