What does it all mean?

• It’s inflation week in Australia and while the official quarterly inflation data is not released till Wednesday; the release of the monthly TD inflation gauge provides a useful backdrop in setting the inflation landscape. The December reading of 0.7 per cent was surprisingly high and lifted the annual rate to 2.7 per cent. The overall headline measures look concerning however as the TD report highlights it tends to be a “seasonally strong month” for the inflation gauge.
• Overall inflation is pretty much under control at present. However given the falling Australian dollar, the big unknown is to what extent imported inflation lifts over coming months. Domestic inflation has been on the high side over the past year and the Reserve Bank will be looking closely at the transition between domestic and imported inflation.
• We expect a relatively subdued quarterly increase of 0.4 per cent for headline inflation and 0.6 per cent for underlying inflation in the December quarter. Overall inflation looks likely to remain well inside the Reserve Bank’s 2-3 per cent target band in the quarter; however it may just be that the low point for inflation has been reached.
• There are two reasons why the Chinese economic data is important. First, China is the biggest driver of the global economy. And second, China is Australia’s largest trading partner.
• Overall it is clear that the Chinese economy remains in good shape. The world’s second largest economy growing at a 7.7 per cent annual pace, while ensuring that inflation remains well contained. It is clear that the economy has slowed modestly in the December quarter but that was largely expected given growth was relatively robust in the September quarter.
• Whether it is production, investment or retail spending, growth rates will slow in coming years as the economy matures. But an economy of 1.3 billion people travelling at a 7.7 per cent annual pace is a sight to behold. In addition the slowdown has been engineered by policymakers to ensure that a sustainable level of growth is maintained. The focus will now shift to the HSBC/Markit “flash” January manufacturing read, out on Wednesday.
• According to the official data, the national petrol price rose by 1 cent last week. And while motorists could do with cheaper – particularly given that the national average price was holding at 5½-year high a fortnight ago, the lift in fuel prices was largely due to the vagaries of the discounting cycle.
• There should be better news in the days ahead. Global fuel prices have continued to fall, while the Aussie dollar has managed to strengthen modest. The wholesale price has fallen by around 3.5 cents since peaking about a fortnight ago and it should filter through to domestic pump prices in the next couple of weeks. CommSec expects fuel prices to fall by 2 cents over the next 7-10 days.
• Interestingly the discounting cycle is at a peak (high point) across most capital cities, and should ease steadily over the next 8-10 days. The bottom line is motorists would be best served filling up the vehicle in just over a week’s time when prices head toward the lows.
• Today’s economic data gives the Reserve Bank further reason to stay on the interest rate sidelines.

What do the figures show?

Inflation gauge:

• The monthly inflation gauge rose by 0.7 per cent in December after a 0.2 per cent rise in November. The annual rate of inflation lifted from 2.4 per cent to 2.7 per cent.
• The underlying rate (trimmed mean) rose by 0.4 per cent in December. The annual rate lifted from 2.3 per cent to 2.9 per cent.
• Excluding volatile items like petrol and fruit & vegetables, the inflation gauge rose by 0.4 per cent in December after rising 0.1 per cent in November. The annual rate of inflation lifted from 1.7 per cent to 1.8 per cent.
• TD Securities noted that “Contributing to the overall change in December were price rises for fruit and vegetables, tobacco, automotive fuel, and holiday travel and accommodation, the latter seasonal. These were offset by falls in furniture, clothing, and rent. The price of automotive fuel rose by 5.0 per cent in December, and the price of fruit and vegetables rose by 5.8 per cent.”

Petrol prices:

• According to the Australian Institute of Petroleum, the national average Australian price of unleaded petrol rose by 1 cent a litre to 155.1 c/l in the week to January 19. The metropolitan price rose by 1.7 c/l to 154.5 c/l, while the regional average price fell by 0.3 c/l to 156.4 c/l.
• Average unleaded petrol prices across states and territories over the past week were: Sydney (rose by 2 cents to 151.6 c/l), Melbourne (up by 1.8 cents to 152.4 c/l), Brisbane (up 2 cents to 159.1 c/l), Adelaide (up 6.1 cents to 155.9 c/l), Perth (down 1.5 cents to 154.2 c/l), Darwin (up 0.2 cents to 173.1 c/l), Canberra (fell by 0.4 cents at 158.5 c/l) and Hobart (down 0.1 cents to 162.2 c/l).
• Today, the national average wholesale (terminal gate) unleaded petrol price stands at 144.68 c/l, down 2.3 cents a litre over the week and but still up almost 12 cents since the lows in early November.
• Last week the key Singapore unleaded petrol price fell by US$1.40 (1.2 per cent) to US$116.00 a barrel. But in Australian dollar terms the Singapore gasoline price fell by 33 cents last week to $131.50 a barrel or 82.71 cents a litre.
• Figures from MotorMouth show that petrol prices have hit their high point or at the peak in the discounting cycle across most capital cities at present, and should ease over the next 10 days to the lows in the cycle.

Chinese economic data

• The Chinese economy grew at a 7.7 per cent annual pace in the December quarter, in line with forecasts and down from 7.8 per cent in the September quarter. The economy grew by 1.8 per cent in the December quarter, down from 2.2 per cent in the September quarter.
• Retail sales rose at a 13.6 per cent annual rate in December, in line with forecasts and down slightly from the 13.7 per cent annual rate in November (fastest in eight months).
• Industrial production rose at a 9.7 per cent annual rate in December, below the forecast average (9.8 per cent) and down on the 10.0 per cent annual rate in November.
• Urban investment rose at a 19.6 per cent annual rate over 2013, below forecasts of a 19.8 per cent increase and below the 19.9 per cent growth recorded for the 11 months to November.
• 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.
• China’s National Bureau of Statistics releases its monthly economic statistics around mid-month. Quarterly GDP data is released around the 16th of January, April, July and October. China’s Customs Office releases trade data, and the People’s Bank of China releases financial statistics, around the 10^th of each month. China is Australia’s largest trading partner and changes in the Chinese economic have major implications for the Aussie economy.
• The Reserve Bank would be justifiably content with the latest batch of economic data. There is nothing to suggest that official interest rates need to budge from current levels. And the expectation of a fall in fuel prices will improve household budgets and support retail activity.

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.
• China’s National Bureau of Statistics releases its monthly economic statistics around mid-month. Quarterly GDP data is released around the 16th of January, April, July and October. China’s Customs Office releases trade data, and the People’s Bank of China releases financial statistics, around the 10^th of each month. China is Australia’s largest trading partner and changes in the Chinese economic have major implications for the Aussie economy.

What are the implications for interest rates and investors?

• The Reserve Bank would be justifiably content with the latest batch of economic data. There is nothing to suggest that official interest rates need to budge from current levels. And the expectation of a fall in fuel prices will improve household budgets and support retail activity.