Inflation is under control: The TD Securities-Melbourne Institute monthly inflation gauge rose by 0.5 per cent in December and stands 2.4 per cent higher than a year ago.
Excluding volatile items, the annual inflation rate was 2.1 per cent – at the low end of the Reserve Bank’s 2-3 per cent target band.
However, petrol prices rose sharply; according to the Australian Institute of Petroleum the national average petrol price rose by 3.1 cents to 143.4 cents a litre last week. Today the wholesale (terminal gate) price stands at a near three-month high of 136 cents a litre, up 2.6 cents a litre compared with last week. Over the past four weeks, the wholesale price has risen by 5 cents a litre. So far the pump price have only risen by 2.7 cents a litre.
What does it all mean?
The latest monthly rise in the inflation gauge is certainly not overly concerning. In fact if you look at a longer time frame inflation is well and truly contained. The three-month annualised rate of the “headline” monthly inflation gauge as well as its underlying (trimmed mean) component and core measure (excludes volatile items) are now hovering between 0.5-1.9 per cent – well below the Reserve Bank’s 2-3 per cent target band.
It’s great news for the Reserve Bank and great news for Australians more generally. Inflation is pretty much non-existent, ensuring that the Reserve Bank shouldn’t have any qualms about cutting rates to give the domestic economy an adrenaline boost.
We believe that the Reserve Bank should be cutting rates at its next board meeting in February. However given the two rate cuts that have already taken place in the past couple of months, the Reserve Bank may hold off in cutting rates till March to get a better gauge of how the economy is travelling and not willing to use up too much ammunition, too early in case there is any further fall-out from Euro region problems.
The petrol price rose sharply over the past week and unfortunately for motorists the bad news is far from over. The cheaper discount day in the ten-day petrol price cycle has just passed and it is likely that pump prices will rise in the next fortnight – especially given that wholesale prices have surged in recent weeks and are now holding near three month highs. In addition over the past month the pump prices have yet to fully reflect the rise in the terminal gate price and as such CommSec expects another 2 cent rise in petrol prices over the next fortnight.
What is the importance of the economic data?
- The TD Securities/Melbourne Institute Monthly Inflation Gauge is designed to “provide a timely and accurate monthly measure of inflation in Australia”. The Bureau of Statistics only releases the Consumer Price Index on a quarterly basis.
- Weekly figures on petrol prices are compiled by ORIMA Research on behalf of the Australian Institute of Petroleum (AIP). National average retail prices are calculated as the weighted average of each State/Territory’s metropolitan and non-metropolitan retail petrol prices, with the weights based on the number of registered petrol vehicles in each of these regions. AIP data for retail petrol prices is based on available market data supplied by MotorMouth.
What are the implications for interest rates and investors?
Inflation looks to be well contained, allowing the Reserve Bank to focus on stimulating the domestic economy over the next few months if it is required. The health of the global economy will play an important role in the Reserve Bank’s thinking and CommSec expects that interest rates will be cut again next month.
If rates do fall further, investors will need to give greater thought about where to invest funds. Term deposits are attractive, but arguably fully-franked dividends on bank stocks are even more enticing.
