Rental inflation and new build purchase costs, which trend closely with trimmed-mean inflation, had moderated, he explained.
“We're getting 0.5%, instead of 0.7% or 0.8% [m/m rent inflation, excluding government subsidies],” Fabo said, noting the Reserve had highlighted housing costs within the most recently published minutes. “That's a big area to watch in terms of their risks around monetary policy, and the latest couple of months have been quite weak. As an anchor for underlying inflation, that's really positive.”
Fabo warned against putting too much faith into the monthly trimmed-mean measure, which the RBA views as highly unreliable.
"The monthly data are trimmed at the annual level, whereas the quarterly trimmed mean is trimmed at the quarterly level using seasonally adjusted data, which means they are different and why they diverge – there's more volatility in the year-ended measure," he explained, noting the rise in October's data did not surprise.
FALLING INFLATION
Fabo creates his own year-ended monthly measure, excluding volatile prices such as travel expenses and government subsidy-distorted electricity prices. "The rate of decline in that has slowed, but it's continued to edge lower," he explained. (See chart) Some aspects of the official monthly data could also be used to estimate Q4 inflation roughly, which pointed to a lower result than the RBA's 0.7% q/q target on preliminarily findings, Fabo noted.
Pointing to the RBA's November meeting minutes that revealed the Board would need to see “more than one good quarterly inflation outcome” before easing, Fabo questioned the definition of "good".
"If you've got a solid 0.5% q/q for Q4 trimmed inflation and it's not just due to a couple of one offs, that really increases the chance of getting some easing early next year," he added, noting an easing labour market would then also factor heavily into the Board's decision.
"If the labour market continues to gradually ease alongside a surprisingly low inflation number, you'd be very tempted as a central bank, given the lags, to start slowly easing with just a 25bp move. If we get a trimmed mean number for Q4 at 0.6% q/q, that's definitely a good number, because essentially, that's the middle of the band in annualised terms. But unless the labour market is really deteriorating, [the RBA] will need more evidence that it's not just a one off."
The Australian Bureau of Statistics will release Q4 CPI data on Jan 29.