The main measure of inflation in Australia – the Consumer Price Index (CPI) rose by 0.9 per cent in the June quarter, above economist expectations focussed on an increase of 0.7 per cent. The annual rate of inflation rose from 3.3 per cent to 3.6 per cent.
Higher prices for fruit, petrol, medical costs, furniture, financial services and rents were only partially offset by lower prices for electrical and technology goods, vegetables, milk, electricity, domestic holiday costs and toiletries.
The Reserve Bank focuses on three “underlying” price measures – trimmed mean, weighted median and CPIX (CPI less fruit, vegetables, petrol and deposit and loan facilities). The trimmed mean rose by 0.9 per cent (2.7 per cent annual); the weighted median rose by 0.9 per cent (2.7 per cent) and we estimate that CPIX rose 0.5 per cent (2.4 per cent).
The average of the Reserve Bank’s preferred “underlying” measures of inflation – weighted median, trimmed mean and CPIX – rose from 2.4 per cent to 2.6 per cent in annual terms.
Interestingly two other measures of “underlying” inflation printed on the low side. The All groups measure excluding ‘volatile’ items rose by 0.5 per cent in the June quarter with the annual rate falling from 2.6 per cent to 2.5 per cent. And the measure of “Market goods and services excluding ‘volatile’ items” rose 0.6 per cent in the June quarter with the annual rate steady at 1.8 per cent.
In response to the inflation data the Aussie dollar hit a 29-1/2 year high of US110.61 cents.
What are the implications for interest rates and investors?
The domestic economy is expected to pick up speed in the latter part of the year and into 2012. No doubt the concern for policymakers will be if the higher inflation reading becomes entrenched and feeds through the economy. There is no question that inflationary pressures will remain the hot button issue for the Reserve Bank over the midterm, and the key will be how quickly labour markets tighten up.
However it is important to highlight that at present the economy is going sideways, while consumers are remaining conservative and refusing to spend unless goods are on special. As long as consumers remain conservative and businesses have to shave margins to move stock then underlying inflation should remain within the Reserve Bank’s target band of 2-3 per cent. In addition interest rates are already restrictive and as such CommSec expects the Reserve Bank to remain on the interest rate sidelines until the latter part of the year, with a rate hike pencilled in for November.
