Australian quarterly CPI data published today showed a fall in both headline and underlying measures of inflation in the three months to September. Monthly CPI data also released today, however, showed a second consecutive increase in headline inflation in September.

The consumer price index rose 1.2 percent on the quarter in the three months to September after increasing 0.8 percent in the three months to June, just above the consensus forecast for an increase of 1.1 percent. Headline CPI inflation fell from 6.0 percent to 5.4 percent, also just above the consensus forecast of 5.3 percent. This is the third consecutive decline in quarterly headline inflation and takes it to its lowest level in six quarters.

The increase in headline CPI in the three months to September was largely driven by a big increase in fuel prices, up 7.2 percent on the quarter after falling in the two previous quarters. Electricity prices rose 4.3 percent on the quarter after wholesale producers delivered annual price reviews in July, and would have risen by much more were it not for the impact of government rebates. Food prices rose at only a moderate pace, while childcare costs fell sharply in response to an increase in government subsidies.

Measures of core inflation, which exclude the impact of volatile price changes, also moderated in the three months to September. The trimmed mean CPI advanced 1.2 percent on the quarter after rising 0.9 percent previously, with the year-over-year increase falling from 5.9 percent to 5.2 percent. The weighted median CPI inflation measure rose 1.3 percent on the quarter after increasing 1.0 percent previously, with the year-on-year increase falling from 5.5 percent to 5.2 percent.

Officials have kept policy rates on hold for the last four months, reflecting their assessment that inflation will return to the target range over the next two years, partly in response to earlier policy tightening. With both quarterly and monthly data published today showing declines in measures of underlying inflation, officials will likely remain confident for now that the previous policy tightening is continuing to have the expected impact. Nevertheless, officials have also highlighted upside risks to their inflation forecasts and have advised that they are ready to tighten policy further if they consider price pressures are not moderating quickly enough.

The quarter-over-quarter rate is seen at 1.1 percent versus 0.8 percent in the second quarter; the third-quarter year-over-year rate is seen at 5.3 percent versus the second quarter's 6.0 percent.

The Consumer Price Index (CPI) is a measure of the average change over time in the prices paid by households for a fixed basket of goods and services. In Australia, the CPI measures the changes in the price of a fixed basket of goods and services, acquired by household consumers who are residents in the eight State/Territory capital cities. (Darwin, Perth, Sydney, Melbourne, Hobart, Brisbane, Canberra and Adelaide).

Data are released quarterly and, since 2022, monthly. Quarterly inflation data measure the year-over-year change in the index relative to the same quarter twelve months previously. Monthly inflation data measure the year-over-year change in the index relative to the same month twelve months previously.

The consumer price index is the most widely followed indicator of inflation. An investor who understands how inflation influences the markets will benefit over those investors that do not understand the impact. In countries such as Australia, where monetary policy decisions rest on the central bank's inflation target, the rate of inflation directly affects all interest rates charged to business and the consumer.

Inflation is an increase in the overall prices of goods and services. The relationship between inflation and interest rates is the key to understanding how indicators such as the CPI influence the markets - and your investments. Inflation (along with various risks) basically explains how interest rates are set on everything from your mortgage and auto loans to Treasury bills, notes and bonds. As the rate of inflation changes and as expectations on inflation change, the markets adjust interest rates. The effect ripples across stocks, bonds, commodities, and your portfolio, often in a dramatic fashion.

By tracking inflation, whether high or low, rising or falling, investors can anticipate how different types of investments will perform. Over the long run, the bond market will rally (fall) when increases in the CPI are small (large). The equity market rallies with the bond market because low inflation promises low interest rates and is good for profits.

For monetary policy, the Reserve Bank of Australia generally follows the annual change in the consumer price index. It has an inflation target of 2 percent to 3 percent. The RBA also has two preferred core or analytical measures - the weighted and trimmed means. The trimmed mean is a method of averaging that removes a small percentage of the largest and smallest values before calculating the mean. After removing the specified observations, the trimmed mean is found using an arithmetic averaging formula. The weighted mean excludes certain items from the CPI basket (the exclusion approach). Typically, the excluded items are those that are volatile and/or display pronounced seasonal patterns, and those that are subject to administrative price setting.