Chalmers warns Mid-East conflict to drive inflation

Despite the fall in unemployment, economists said the data largely affirmed the RBA’s assessment that the jobs market, which was the tightest in almost 50 years, was softening.

The conflicting trends of a cooling labour market and persistent inflation present a challenge for RBA governor Michele Bullock as she assesses the need for further rate hikes to get inflation back to within the bank’s target range by the end of 2025.

Markets ascribe a one-in-four chance the RBA will raise the cash rate to 4.35 per cent from 4.1 per cent at its Melbourne Cup day meeting on November 7 and are fully priced for a move by March.

The benchmark S&P/ASX 200 tumbled 1.4 per cent to 6981.60 on Thursday as rising Middle East tensions put investors on the defensive.

US Federal Reserve chairman Jerome Powell will deliver a highly anticipated speech to the Economic Club of New York at midday Thursday (Friday 3am AEDT). His remarks will be closely scrutinised for any hints about whether the Fed will deliver another rate rise at its November 1 meeting, which would add to pressure on the RBA to lift rates.

Analysts agree September quarter consumer price index data, to be released on October 25, will be pivotal in determining whether the RBA board raises the cash rate when it next meets.

The RBA said on Tuesday it had a low tolerance for any upside surprises to inflation, leading analysts to speculate a combination of stronger-than-expected services inflation figures in the September quarter CPI and the inflationary effect of a multi-month increase in oil prices could force the bank’s hand.

Ms Bullock said on Wednesday that she was worried the escalating conflict between Hamas and Israel could keep inflation and oil prices higher for longer, while also triggering a slowdown in global growth.

Dr Chalmers on Thursday backed in Ms Bullock’s remarks, noting oil prices had been rising since June as major producers including Russia and Saudi Arabia limited supply, driving petrol prices above $2 per litre.

“Obviously, conflict in the Middle East introduces an element of uncertainty into the global economy because it runs the risk of putting upward pressure on oil prices,” Dr Chalmers said.

Volatility in oil markets has increased since Hamas’ initial October 7 attack on Israel, as speculators contemplate the possibility that the US could impose fresh sanctions on Iranian oil exports if the country is officially linked to Hamas’ attack on Israel. Brent crude traded at $US91 a barrel on Thursday.

Citi economists Josh Williamson and Faraz Syed said underlying inflation was on track to exceed RBA forecasts and risked triggering a rate rise on November 7.

They estimated trimmed mean inflation was 1.3 per cent in the three months to September, far higher than the central bank’s official projection of 0.9 per cent.

“A variety of subsidies for households, along with falling airfare prices, are more than offset by rising energy costs including electricity and automotive fuel,” they said.

“But underpinning the acceleration in underlying inflation is sticky core services. This will likely concern the RBA more than energy costs, and now raises a firm prospect of a November hike.”

Jobs market softens

Complicating the RBA’s decision-making are signs both the jobs market and economic growth are slowing in response to the most rapid interest rate tightening cycle in decades.

The minutes of Ms Bullock’s first RBA board meeting as governor noted increasing underemployment and youth joblessness as evidence the labour market was buckling under the pressure of higher rates.

Underemployment was 6.4 per cent in September, up from the low of 5.8 per cent reached in February. The unemployment rate among 15- to 24-year-olds was 8 per cent, after falling as low as 7.1 per cent last year.

Full-time employment – a traditional barometer of strength in the jobs market – has fallen by 53,000 since June, while 122,000 people gained part-time work.

Westpac economist Ryan Wells said the September jobs data provided a mixed read on the state of the labour market.

“Broadly, it is consistent with the notion that the labour market has moved past its tightest point but is not yet slackening materially,” Mr Wells said.

Employment increased by a weaker than expected 6700 people in September, countering economists’ expectations for modest growth of 20,000.

But a fall in the participation rate to 66.7 per cent from 67 per cent meant the paltry gains were enough for the unemployment rate to fall to 3.6 per cent from 3.7 per cent, keeping the national jobless rate within the narrow 3.4 per cent to 3.7 per cent range it has hovered in since June last year.

The ABS said the decline in participation was largely due to unemployed people exiting the labour force.

The RBA expects the jobless rate to break its holding pattern and drift higher to 3.9 per cent by the end of the year, and 4.5 per cent by mid-2025.

Employment gains of at least 35,000 are needed each month to stop unemployment from ticking higher based on the current elevated rate of net overseas migration, assuming the participation rate stays unchanged.

So far, strong demand from employers has easily soaked up a surge in foreign arrivals, which some economists expect to have hit 500,000 migrants in the 2022-23 financial year.

Low unemployment has driven nominal wages growth close to a decade high of 3.6 per cent, fuelling inflation in services such as hairdressing and restaurant meals, where labour costs are a key driver of final prices.

The RBA will be buoyed by the 0.9 per cent decline in hours worked in the September quarter, since this implies higher labour productivity, which is needed to put a lid on services inflation.

ABS head of labour statistics Kate Lamb said the softening in hours worked was suggestive of an easing in labour market strength.

“Though it also follows particularly strong growth over the past year. As seen in the job vacancies data, demand for workers has fallen slightly, but the labour market continues to be relatively tight and resilient,” Ms Lamb said.