Tame inflation result soothes RBA nerves

From

Consumer Price Index

  • Tame inflation: The Consumer Price Index – the main measure of inflation in Australia – rose by 0.6 per cent in the March quarter, below expectations for a lift of around 0.8 per cent. In seasonally adjusted terms the CPI rose by 0.5 per cent. The CPI stands 2.9 per cent higher than a year ago – the highest outcome since December quarter 2011.
  • Underlying measures: The Reserve Bank monitors three measures to derive the underlying inflation rate. The trimmed mean rose by 0.5 per cent in the March quarter (2.6 per cent annual); the weighted median rose by 0.6 per cent (2.7 per cent annual) and the CPI less volatile items rose by 0.5 per cent (2.7 per cent annual). Overall, underlying inflation rose by 0.5 per cent in the quarter and around 2.7 per cent over the year. The Reserve Bank had previously indicated that it expected underlying inflation to be “close to 3 per cent over the year to June 2014.”
  • The Bureau of Statistics noted: The most significant price rises this quarter were for tobacco (+6.7 per cent), automotive fuel (+4.1 per cent), secondary education (+6.0 per cent), tertiary education (+4.3 per cent), medical and hospital services (+1.9 per cent) and pharmaceutical products (+6.1 per cent). These rises were partially offset by falls in furniture (–4.3 per cent), maintenance and repair of motor vehicles (–3.3 per cent), international holiday travel and accommodation (–2.4 per cent) and domestic holiday travel and accommodation (–2.4 per cent).

What does it all mean?

  • At present inflation is not a threat to the economy, meaning that the Reserve Bank can comfortably keep interest rates at exceptionally low levels over the near term. However as the Reserve Bank has highlighted in recent commentary, the medium term outlook for inflation has certainly shifted higher and this is one likely reason that policymakers are no longer talking down the Aussie dollar and seem more comfortable with the Aussie holding between US90-95c.
  • The headline inflation measure rose by a tame 0.6 per cent in the December quarter and this time round the even more closely-watched underlying measures suggested that inflation was well contained. The average of the three key underlying inflation measures lifted by a much more sedate 0.5 per cent in the quarter to be up 2.7 per cent over the year – well within the Reserve Bank’s 2-3 per cent target band.
  • Interestingly, and somewhat surprisingly, domestic price pressures were the main driver over the quarter. Domestic price pressures lifted with non-tradable goods and services lifting by 0.6 per cent in the quarter mainly due to rises in electricity, education fees and medical and hospital services. Imported inflation lifted by just 0.4 per cent in the quarter and it is likely that, given the recent lift in the Australian dollar, imported inflation will continue to offset domestic price pressures.
  • However, on a positive note, policymakers would be more comforted by the deflationary aspect of prices for market-determined services with prices falling 0.1 per cent in the quarter. It seems to suggest that the slower and weaker wage growth (which has been part of the economic landscape for the past year) is finally filtering through to a fall in prices for services.
  • Whichever way you cut it, inflation is well and truly in check and ensures that the Reserve Bank can continue with its rhetoric of “interest rate stability”. More focus will be paid to labour market conditions in coming months. A lift in employment growth will give the Reserve Bank more comfort to gradually raise the cash rate towards year end. CommSec expects the first rate hike in the December quarter.
                 
                 
 

 

The inflation measures monitored by the Reserve Bank

 

 

Quarterly

Year-ended

 

Dec Qtr 13

Mar Qtr 14

Dec Qtr 13

Mar Qtr 14

 

CPI – seasonally adjusted

0.9

0.5

2.7

2.9

 

CPI – unadjusted

0.8

0.6

2.7

2.9

 

– Tradables

0.7

0.4

1.0

2.6

 

– Tradables excl volatile items(a), tobacco

0.5

na

-0.1

na

 

– Non-tradables

0.9

0.7

3.7

3.1

 

 

Selected underlying measures

 

Trimmed mean

0.9

0.5

2.6

2.6

 

Weighted median

0.9

0.6

2.6

2.7

 

CPI excluding volatile items(a)

0.8

0.5

2.6

2.7

 

CPI excluding volatile items & tobacco(a)

0.8

na

2.4

na

 

 

(a) Volatile items are fruit, vegetables and automotive fuel (r) revised

 

Source: ABS, CommSec

 

 

 

 

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