4.3%: What do today's hot inflation numbers mean for ASX shares?

We got quite the October surprise (to borrow a political phrase from the US) from the Australian Bureau of Statistics (ABS) today regarding the latest inflation figures for the Australian economy. Unfortunately, it wasn't a pleasant one – for either the economy or ASX shares.

According to the ABS data, the consumer price index (CPI) rose by 4.3% over the 12 months to September. That was up from a flat 4% over the 12 months to August. That's the headline inflation figure though, which takes into account volatile items like fuel. The trimmed mean figure, which is the one that the Reserve Bank of Australia (RBA) prefers to use, had prices rising 3.6% in September, up from 3.5% last month.

Rachael McCririck, ABS head of price statistics, said that housing and fuel costs were the largest drivers of this increase in prices:

Housing was the largest contributor to annual inflation in September, rising by 5.2 per cent. "Annual inflation of 5.2 per cent for Housing reflected rising costs for both New dwellings and Electricity. New dwelling prices rose 4.7 per cent in the 12 months to September as builders passed on higher costs for materials and labour. This is down from 5.4 per cent in the 12 months to August."

Transport was the second largest contributor to annual inflation in September, rising by 8.7 per cent, due to higher automotive fuel prices. On a monthly basis, Automotive fuel prices rose 9.4 per cent in September, compared to a rise of 14.8 per cent in August. This was driven by higher world oil prices.

The RBA had previously forecast that inflation would be running at around 3.4%, so these figures are hotter than expected. We can see this playing out in the share market right now.

ASX shares pull back as inflation runs hot

Before these figures were released, the S&P/ASX 200 Index (ASX: XJO) was having a very pleasant day indeed, up by close to 1% in mid-morning trade. However, since this release, investors have started pulling back. At the time of writing, ASX shares are barely breaking even, with the ASX 200 presently up a far tamer 0.15%.

This shouldn't come as a surprise to anyone. Unexpectedly higher inflation means that there is a real risk that interest rates are now more likely to rise even further. The RBA has been in a ferocious battle against inflation all year, raising the cash rate four times in 2026 to date. As everyone with a mortgage would be painfully aware, today, the cash rate is sitting at 4.6%. That's its highest level since 2011.

After last month's hike, the RBA indicated that it didn't view the fight against inflation as finished. Today's inflation figures will do nothing to change that view. Arguably, quite the opposite.

Higher interest rates are traditionally bad news for ASX shares. For one, they actively work to slow the economy down, which bodes poorly for the ASX shares that inhabit it. For another, they make safer investments like term deposits and savings accounts more attractive compared to 'risky' assets like shares.

According to the ASX's RBA Rate Tracker, investors were assigning a 60% likelihood of a change in interest rates next month as of yesterday, up from 16% on 15 October. That's likely to be far higher after these figures.

The markets are bracing for more interest rate rises. We should too.

The post 4.3%: What do today's hot inflation numbers mean for ASX shares? appeared first on The Motley Fool Australia.

Motley Fool contributor Sebastian Bowen has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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