Consumer price index
-
Interest rate cut almost certainly off the agenda.
Inflation lifts: The Consumer Price Index – the main measure of inflation in Australia – rose by 1.2 per cent in the September quarter, above expectations for a lift of around 0.8 per cent. In seasonally adjusted terms the CPI rose by 1.0 per cent. The CPI stands 2.2 per cent higher than a year ago.
- Underlying measures were mildly higher: The Reserve Bank monitors three measures to derive the underlying inflation rate. The trimmed mean rose by 0.7 per cent in the September quarter (2.3 per cent annual); the weighted median rose by 0.6 per cent (2.3 per cent annual) and the CPI less volatile items rose by 1.1 per cent (2.4 per cent annual). Overall, underlying inflation rose by 0.8 per cent in the quarter and around 2.3 per cent over the year – at the lower end of the Reserve Bank’s target band.
- Rate cut are off the agenda: The latest data closes the door on any further rate cuts this year. Financial markets see a just a 6 per cent chance of a rate cut in November. The Aussie dollar lifted almost half a cent to US97.4 cents.
What does it all mean?
- At present inflation is not a threat to the economy, meaning that rates can stay at these exceptionally low levels over the near term. However the medium term outlook for inflation has certainly shifted higher. While the weaker Australian dollar was the main culprit, with a lift in prices of a raft of imported goods (especially fuel prices), prices rise were broad-based and included electricity charges, domestic holiday accommodation and rents.
- Inflation rose by 1.2 per cent in the September quarter and when seasonal factors are taken into account, inflation rose by 1.0 per cent. Interestingly and somewhat surprisingly it wasn’t just imported inflation that was the main driver over the quarter. Domestic price pressures also lifted with non-tradable goods and services lifting by 1.1 per cent in the quarter.
- While the headline measures suggest inflation had lifted substantially, the closely-watched underlying measures were more in line. Annualised underlying inflation is holding near the middle of the Reserve Bank’s 2-3 per cent target band. The average of the three key underlying inflation measures stands at 2.3 per cent.
- When the June quarter inflation data was released we noted that “the sizeable fall in the currency is likely to shift the central bank’s inflation forecasts higher. Not only will the retail sector not be discounting to the same extent it did earlier in the year, but higher fuel prices will feed through the economy in higher transportation costs”. And while the latest result highlighted that thematic to an even greater degree, looking forward if the recent lift in the Australian dollar is sustained it is likely that we may get a more subdued inflation reading in the December quarter.
- Overall the latest result is likely to see the Reserve Bank shift from debating the merits of another rate cut to a more neutral stance. CommSec believes that interest rates are likely to remain on hold for the remainder of the year. The Reserve Bank would not be comfortable with the recent lift in the Australian dollar, however an overall higher inflation result and potential risks around a housing bubble will likely see them take the path of least regret – remain on the interest rate sidelines, while talking down rates.
