CPI key focus, markets toy with rate rise

Australian shares look set for a positive start to the week.
Australian shares look set for a positive start to the week.

The Reserve Bank of Australia is adamant the nation is not facing the same sort of inflation pressures being seen in other parts of the world and which has prompted some central banks to start lifting interest rates.

But Australian financial markets are not convinced the RBA's sanguine view will hold and are pricing in the risk of rising rates as early as next year, much earlier than the central bank is predicting.

Market interest rates were particularly jolted by the unexpectedly sharp rise in New Zealand's annual inflation rate reported last week, which has reached almost five per cent and the highest since 2011.

The Australian Bureau of Statistics will release the consumer price index for the September quarter on Wednesday.

Economists' forecasts point to a 0.8 per cent rise in the quarter, driven by rising prices for fuel, food, household furnishings and alcohol and tobacco.

Petrol prices hit a 13-year high last week.

However there is some uncertainty whether there will be any lingering impact from the federal government's now expired HomeBuilder grants program.

While the annual rate is forecast to ease to 3.1 per cent from 3.8 per cent as of the June quarter, it would still remain at the top end of the RBA's two to three per cent inflation target.

In the June quarter, the annual rate of CPI spiked to its highest level in some 13 years as a result of rising fuel prices and the unwinding of government support introduced during the depths of last year's recession.

But underlying inflation - which smooths out excessive price swings and is more linked to interest rate decisions made by the RBA - is likely to remain subdued.

Predictions centre on underlying inflation rising 0.5 per cent in the September quarter to 1.9 per cent annually.

"The market may be expecting an upside surprise ... especially on the back of the NZ CPI," Deutsche Bank strategist Tim Baker says.

"But Australia doesn't count used cars, has government policy weighing on housing costs and won't have an odd international airfare contribution."

These were the big drivers of NZ's inflation result.

The RBA's most recent forecasts see both annual CPI and underlying inflation returning to 1.5 per cent by mid-2022.

The central bank has persistently said it will not lift the cash rate until inflation is sustainably within the two to three per cent inflation target, a condition it does not expect to be met before 2024.

Deputy governor Guy Debelle will be able to provide his thoughts on the inflation result and interest rate outlook when he faces a Senate estimates with assistant governor Michele Bullock on Thursday.

Meanwhile, Australian shares look set for a positive start to the week, despite a mixed finished on Wall Street on Friday where losses for several large technology stocks weighed on the market.

However the Dow Jones Industrial Average just did enough to eclipse its previous record high set on August 16, gaining 73.94 points or 0.2 per cent to 35,677.02.

The S&P 500 slipped 4.88 points, or 0.1 per cent, to 4,544.90, while the Nasdaq slid 125.50 points, or 0.8 per cent, to 15,090.20.

Australian share futures were 30 points, or 0.4 per cent, higher at 7416.

On Friday, the Australian benchmark S&P/ASX200 index closed higher by 0.1 points, or zero per cent, to 7415.5.

Australian Associated Press