Inflation blows out - is this the end for rate cuts?

Hi everyone,

That inflation figure this week has been a real shock. We can now forget about any interest rate cuts for some time - maybe even a long time.

I did warn that the annual CPI could come in above 3 per cent, though I’ll admit I was feeling a bit lonely with that prediction when most others were expecting a much lower figure. But I was hearing plenty of feedback from consumers that cost pressures remain a real issue.

So, in this week’s newsletter:

• Inflation blows out … is this the end for rate cuts?

• Beware the fixed rate home loan trap.

• Unemployment is still on watch when it comes to interest rates.

• Why investors trust Greece more than us.

• Which state and territory economies are performing the best?

• Apartments are now worth more in the Gold Coast than Sydney.

• Long-term global sharemarket performance: How Australia rates.

• Why Tesla is priced to perfection.

Inflation blows out ... is this the end of rate cuts?

Last Monday night, Reserve Bank Governor Michele Bullock said that if the September quarter CPI trimmed mean came in at 0.9 per cent, it would be a "material miss" to the central bank's forecasts. On Wednesday the actual result came in at 1 per cent - well above what the RBA had forecast and way above what the financial markets were expecting.

That’s how bad this week’s CPI was.

It now means interest rate cuts will not happen in the foreseeable future. And I think there’s a very real possibility that this may be the bottom of the interest rate cycle and it’s more likely that the next interest rate move could be UP rather than DOWN.

The RBA meets this Tuesday, and financial markets now see the chance of a rate cut at just 8 per cent - down from 40 per cent before the CPI results. The likelihood of a rate cut in December is now seen as less than 25 per cent, also down from 40 per cent.

It wasn’t long ago that many economists were predicting two or three more rate cuts. Now, they’re expecting just one more, with rates bottoming out at around 3.35 per cent.

I’ve been warning over the past month that this week’s CPI would be absolutely crucial to the future of interest rates - and it has been. I also cautioned that a higher-than-expected inflation figure could kill off any chance of further rate cuts.

So, let's look at the numbers and details of these inflation results:

The headline consumer prices accelerated by the most in two and a half years in the September quarter, while the core trimmed mean measure of inflation jumped to the top of the Reserve Bank’s 2-3 per cent inflation target band on an annual basis.

The headline CPI surged 1.3 per cent in the September quarter - the fastest quarterly pace since March 2023 and well above the 1.1 per cent economists expected. Annual headline CPI jumped to 3.2 per cent- a big leap from 2.1 per cent in the previous quarter and above the top end of the RBA’s target band.

The RBA’s preferred trimmed mean measure of core CPI also increased by 1 per cent in the quarter. It’s the strongest gain in 18 months, and well above economist forecasts of 0.8 per cent.

Worryingly, the RBA had been looking for a 0.6 per cent quarterly result. The annual pace rose to 3 per cent from 2.7 per cent in the previous quarter - the first acceleration in inflation since the peak of 6.8 per cent in late 2022.

That’s what will be spooking the RBA Board: inflation has stopped slowing — it’s not stabilising. In fact, it’s turning around and gathering momentum again.

After the last two RBA board meetings, Michele Bullock has expressed concern in her press conferences that while inflation has dropped, we haven’t beaten it.

This week’s result shows that she has been absolutely right to have such doubts.

So, what's driven this disappointing result?

The main contributors to the quarterly increase were housing (up 2.5 per cent), recreation and culture (up 1.9 per cent), and transport (up 1.2 per cent).

But what’s really killed any chance of an interest rate cut next week is energy prices. Electricity prices soared 9 per cent in the September quarter and have jumped 23.6 per cent over the past 12 months.

Why? Remember all those federal and state government electricity rebates designed to win votes before the last federal election? Easing the cost of living, reducing inflation and encouraging interest rate cuts …

Those rebates are now ending and you’re paying the true cost of energy. When they were introduced, Michele Bullock warned they were all smoke and mirrors and artificially reducing the inflation figure to grab votes.

The Australian Bureau of Statistics commented this week:

“The annual rise in electricity costs is primarily related to State Government rebates being used up by households. State Government electricity rebates that were in place in September quarter 2024 included the Queensland $1,000 State rebate, the Western Australia $400 State rebate, and the Tasmania $250 State rebate. Over the year, those rebates have been used up and those programs have finished.”

The other big rise was in property rates and charges, which jumped 6.3 per cent in the quarter. It’s the biggest annual increase since 2014.

The ABS said, “The rise reflects increases in general rates in all capital cities, higher waste levies and additional levies charged by councils.”

We’re in a housing crisis but the local and state government are adding levies. Go figure?

So much for helping affordability.

Rental prices increased 3.8 per cent over the 12 months - which was a welcome slowdown from the previous quarter’s 4.5 per cent - and is the weakest annual growth rate since the September 2022 quarter as vacancy rates stabilised across Australia.

Fuel prices lifted 2 per cent in the September quarter with the cost of maintenance and repair of motor vehicles up 1.2 per cent due to higher labour costs.

Recreational and culture costs surged 1.9 per cent in the quarter with domestic holiday travel and accommodation prices jumping 3.2 per cent. Higher demand during the school holiday periods in July and late September drove increases in domestic accommodation and airfare prices. International holiday travel and accommodation prices also rose 2.7 per cent due to increased demand for holiday travel to Europe. The cost of domestic holidays was up 5.2 per cent on a year ago.

Annual food inflation was steady near 3 per cent for a sixth consecutive quarter. Meals out and takeaway food prices rose 3.3 per cent over 12 months - the strongest annual rise since the June quarter 2024. Prices of coffee, tea and cocoa were up 14.6 per cent annually.

Fruit and vegetable annual price growth of 2.2 per cent continued to slow from a recent high of 8.6 per cent to the September 2024 quarter. Meat and seafood prices lifted 1.1 per cent.

Beware the fixed rate home loan trap

The most common question I’ve been asked this week is: “If we’re near, or at the bottom of, the interest rate cycle, should I fix my home loan?”

It’s a very good question.

The average variable home loan interest rate at the moment is around 5.75 per cent with the lowest rate on offer at around 5.35 per cent. But there are some two-year fixed rate loans at 4.8 per cent. That’s a big gap and is a four 0.25 per cent RBA rate cut difference.

On the surface, it looks like a good strategy to maybe switch to a fixed rate loan or have it as part of a cocktail of loans.

But understand what the rates actually mean.

When I looked at those 4.8 per cent two-year fixed-rate loans, I realised that was the headline rate being advertised - not the comparison rate. You should always judge a loan by its comparison rate, as that’s the figure that includes all fees.

To put it in perspective, those 4.8 per cent headline rates translated into a 5.8 per cent comparison rate. I was shocked. These loans had extraordinarily high fees, and once those were factored in, the effective rate was no better than current variable rates.

The moral of the story: Make sure you understand how an interest rate is calculated before committing. Don’t be fooled.

Unemployment is still on watch when it comes to interest rates

Inflation is too hot. An interest rate cut is off the table … except if unemployment deteriorates badly.

I’ve mentioned this a few times but the RBA has two important pillars to its charter: Keep inflation down and keep Australians in jobs.

That means the RBA is in a tricky situation. Inflation is ramping up again but the jobs market is looking decidedly weak.

So, while rate cuts are off the table from an inflation perspective, they might be back on the table because of unemployment, which currently sits at 4.5 per cent.

History has shown us that employment is usually the last economic indicator to weaken in a slowdown, but when it does, it tends to deteriorate quickly.

As the chart below shows, since the start of the year, jobs growth has significantly underperformed to the level needed to maintain unemployment at low levels. This is an early indicator that unemployment is likely to rise.

Just as we need a minimum number of new homes to be built each year (about 250,000) to keep the property market in balance, we need 204,000 new jobs to be created to keep the employment market in balance.

Both housing and job creation are severely underperforming.

This is the conundrum for the RBA board. They may need to keep rates high for longer to get on top of inflation but that will slow jobs growth because bosses will need to keep paying higher loan repayments rather than hire new staff. Higher loan repayments means consumers have less to spend which dampens business growth and, again, their incentive to hire more people.

It’s a vicious cycle.

It could be that the RBA may have to choose between fighting inflation and creating jobs. It may decide cutting rates to keep people in jobs is more important than fighting inflation.

Time will tell. Keep watch.

Investors trust Greece more than us!

Australia is one of only 10 countries in the world with a Triple-A credit rating from all three major credit rating agencies. The others are Canada, Denmark, Germany, Luxembourg, the Netherlands, Norway, Singapore, Sweden and Switzerland.

So, my question is, why do we have to pay investors such high interest rates to invest in our government bonds when we have an impeccable credit rating?

When a government borrows money it issues government bonds and offers an interest rate which has to be attractive enough to lure the big pension and institutional investors from around the world.

Below is a table of government bond yields from around the world:

Why do we need to pay the second highest with such a rolled gold credit rating?

Which state economies are performing best?

While we always focus on the ‘big picture’ economic data for the country as a whole, I’m always fascinated by how the individual states and territories are performing.

CommBank publishes a quarterly State of the States report,, which always makes for great reading.

Overall, the latest report found that the economic performance of Australian states and territories is being supported by a combination of slowing inflation, lower borrowing costs, rising real wages, increasing home prices, robust government spending, a pickup in housing investment, and a solid labour market.

While private sector activity is improving, business investment remains subdued, job growth is slowing, and weaker public sector activity could eventually push up unemployment and slow wages growth. The future path will depend on the resiliency of the labour market, further interest rate cuts and global trade policies.

Western Australia leads the national performance rankings for the fifth successive report. The state is ranked first on four of the eight economic indicators.

As for the the others:

• Queensland climbs to second place from third, driven by a rebound in household spending.

• South Australia slips to third.

• The Northern Territory jumps to fourth from eighth - its highest position since October 2016 - supported by solid domestic spending.

• Victoria falls back to fifth from fourth.

• Tasmania drops from fifth to sixth.

• NSW dips from equal sixth to seventh, and the ACT sits in eighth place.

Looking forward, consumer spending in NSW, Victoria and the ACT is expected to recover following recent interest rate reductions, but business investment remains weak. Housing construction activity poses an ongoing challenge for both NSW and the ACT amid affordability and supply constraints. The transition from public to private sector-led growth has begun in the bigger states. That said, slowing public demand is expected to continue to weigh on the nation’s capital.

The Tasmanian economy is awaiting a much-needed housing recovery and rebound in exports amid weakness in both private and public sector investment. A modest outlook for private sector demand remains a challenge.

Continuing growth in the private sector, alongside a pickup in public demand, should support the South Australian economy into the new year.

Gold Coast apartments now worth more than Sydney

Property giant Ray White has found the Gold Coast now has a higher median unit price than Sydney - an extraordinary milestone for a market once seen as an affordable coastal alternative.

While Sydney remains Australia’s most expensive city for houses, new data shows that Gold Coast unit prices have edged higher, with a median of $956,000 compared to Sydney’s $927,000.

The recent surge in apartment values shows just how strong demand has become in south east Queensland.

Migration continues to be a major factor. The region is attracting new residents from across Australia and overseas, drawn by lifestyle, climate, and improving infrastructure. Population growth in the Gold Coast and broader south east Queensland remains among the fastest in the country, yet new housing supply is failing to keep pace.

The last time we saw enough homes built in Australia was in 2007, and the backlog has only grown since. Construction timelines have lengthened, costs remain elevated, and the number of completions continues to fall.

Neoval data shows that Main Beach now leads the city, with a median unit price of $1.73 million following a $880,000 rise over the past decade. Close behind is Burleigh Heads and Palm Beach, where median unit prices have climbed by $760,000 and $740,000 respectively. Currumbin and Tugun have also surged, with prices up 134 per cent over the decade and $740,000 in dollar terms.

Long-term global sharemarket performance ... how we rate

While investors focus on the booming US sharemarket and the big technology companies driving that performance, it’s interesting to look back and assess market performance over the long term.

Who would have thought India is the best performing sharemarket since the start of the millennium? South Korea ranks second and then the US.

The performance of the Australian sharemarket ranks seventh with a healthy compound annual growth of 5.1 per cent.

But it reinforces that old adage that it pays to have international exposure in your share portfolio.

Tesla’s need for perfect investment delivery

We’ve all been following the incredible investment performance of the US’s “Magnificent 7” technology companies: Microsoft, Apple, Amazon, Nvidia, Alphabet, Meta and Tesla.

A common measure of share valuation looks at the share price against future earnings (or profits) from the company. If you thought technology stocks were overvalued at the moment, just look at Tesla.

Its share price is 220 times higher than future profits. AI giant Nvidia, by comparison, is on a multiple of only 30.

The share price of Tesla at the moment assumes a perfect few years of performance. Let’s hope they can deliver.

Have a great week, everyone.