Inflation lifts rate cuts of the agenda


Consumer price index

  • Inflation lifts: The Consumer Price Index – the main measure of inflation in Australia – rose by 0.8 per cent in the December quarter, above expectations for a lift of around 0.4 per cent. In seasonally adjusted terms the CPI rose by 0.9 per cent. The CPI stands 2.7 per cent higher than a year ago.
  • Underlying measures were higher: The Reserve Bank monitors three measures to derive the underlying inflation rate. The trimmed mean rose by 0.9 per cent in the December quarter (2.6 per cent annual); the weighted median rose by 0.9 per cent (2.6 per cent annual) and the CPI less volatile items rose by 0.6 per cent (2.6 per cent annual). Overall, underlying inflation rose by 0.8 per cent in the quarter and around 2.6 per cent over the year – lifting towards the higher end of the Reserve Bank’s target band.
  • Rate cuts are off the agenda: The latest data closes the door on any further rate cuts. Financial markets see just a 3 per cent chance of a rate cut in February. The Aussie dollar lifted almost a cent to hold near US88.7 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. The weaker Australian dollar played a part in lifting prices across a raft of imported goods, however prices rise were broad-based and included domestic price increase domestic holiday accommodation, fruit and vegetable price increases and also a lift in new dwelling purchases prices.
  • Inflation rose by 0.8 per cent in the December quarter and when seasonal factors are taken into account, inflation rose by 0.9 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 0.8 per cent in the quarter.
  • The headline inflation measures clearly highlight the substantial lift in inflation and this time round the even more closely-watched underlying measures suggested that was very much the case. Annualised underlying inflation has lifted towards the higher end of the Reserve Bank’s 2-3 per cent target band. The average of the three key underlying inflation measures stands at 2.6 per cent.
  • Interestingly despite the falling Australian dollar, fuel prices fell by 1.1 per cent in the December quarter, largely due to pressure on global oil prices. If petrol prices were to lift over coming months this would feed through the economy in higher transportation costs and in turn price increases across an array of goods and services.
  • 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 over the next six months. The Reserve Bank would be more comfortable that the falling Australian dollar would help rebalance the economy, providing a boost to exports. In turn it is still too early to discuss rate hikes particularly given the sluggishness of the labour market. It seems the path of least regret is to remain on the interest rate sidelines while talking down rates.

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