Australian CPI re-accelerates to 3.8% in October; AUD climbs as rate-cut bets unravel
Australia’s inflation quickened more than expected in October, jolting FX and rates markets as traders slashed odds of near-term easing and nudged up the chance of an RBA hike next year.
At a glance
- Monthly headline CPI rose 3.8% y/y in October (vs 3.6% expected), the fastest in 10 months and a fourth straight month of re-acceleration.
- Trimmed mean inflation increased to 3.3% y/y, underscoring persistent underlying pressures.
- AUD/USD jumped about 0.5% to 0.6502; Australian 3-year yields spiked 11 bps to 3.855%, a new high since February.
- Market pricing slashed May rate-cut odds from roughly 40% to 8%; probability of a hike by late 2025 rose to 32%.
- Inflation gains were broad-based, with services at 3.9% and housing at 5.9% y/y.
FX and bonds: front-end repricing favors the Aussie
The hotter print triggered a swift repricing at the short end of the curve, with front-end yields leading a bear move and bolstering the Australian dollar. AUD/USD’s pop above 0.65 reflects a renewed premium for carry as traders roll back expectations of early easing. The move aligns with typical inflation-shock dynamics: stronger AUD, tighter financial conditions via higher front-end yields, and a flatter curve as policymakers are seen staying restrictive for longer.
Liquidity held up, but price action suggests elevated FX volatility around incoming data as positioning pivots away from a 2025 easing cycle toward a “higher-for-longer” baseline.
RBA implications: easing hopes fade, hike risk creeps in
Economists labeled the release “ugly,” highlighting that the Reserve Bank of Australia cannot credibly consider near-term easing while underlying inflation is turning higher. Markets now ascribe minimal odds to a May cut and a non-trivial chance that policy could tighten by late 2025 if disinflation stalls.
While the RBA prefers quarterly CPI for policy calibration, the breadth of October’s pickup—particularly in services and housing—complicates the narrative that inflation is reliably gliding back to target. Policymakers will want clear evidence that inflation is heading toward the 2–3% band, especially after three cuts earlier this year whose full effects may not yet be fully transmitted to the real economy.
What’s driving the stickiness
Services inflation at 3.9% points to lingering wage and demand pressures, while housing at 5.9% reflects ongoing cost dynamics, including rents and construction-related inputs. The trimmed mean’s rise to 3.3% reinforces the view that underlying price momentum remains too warm for comfort.
Market outlook: watch the data cadence
Into year-end, AUD sensitivity to domestic data should stay elevated, with FX traders tracking labor-market prints, services inflation, and housing indicators for confirmation of sticky trends. A durable break above AUD/USD 0.65 would likely require evidence that growth is holding up despite tighter financial conditions; conversely, any downside inflation surprise could unwind some of today’s front-end repricing. For investors, the balance of risks tilts toward a prolonged restrictive stance rather than swift policy easing, a narrative the latest CPI data decisively underpins, BPayNews notes.
FAQ
What did Australia’s October CPI show?
Headline CPI rose 3.8% year over year, beating expectations of 3.6% and marking the fastest pace in 10 months. The trimmed mean, a gauge of underlying inflation, climbed to 3.3%.
How did markets react to the data?
The Australian dollar rose about 0.5% to 0.6502 against the U.S. dollar. Three-year government bond yields surged 11 bps to 3.855%, the highest since February, as traders priced out near-term rate cuts.
What does this mean for the RBA’s policy path?
Odds of a May rate cut dropped sharply to roughly 8%, and the probability of a hike by late 2025 rose to 32%. The data reinforces a higher-for-longer policy stance unless inflation cools decisively.
Why does the RBA prefer quarterly CPI over monthly data?
The monthly series is more volatile and can be noisy; quarterly CPI provides a fuller, more stable read on price dynamics that better informs policy decisions.
Which inflation components are the main concern?
Services inflation at 3.9% and housing at 5.9% suggest broad-based and persistent pressures, raising the bar for any near-term policy easing.
