Reserve Bank can rest easy on inflation

Consumer price index

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  “Inflation is healthy without being excessive”: Commsec

  Tame inflation: The Consumer Price Index – the main measure of inflation in Australia – rose by 0.5 per cent in the September quarter, in line with expectations. In seasonally adjusted terms the CPI rose by 0.1 per cent. The CPI stands 2.3 per cent higher than a year ago.

• Underlying measures: The Reserve Bank monitors three measures to derive the underlying inflation rate. The trimmed mean rose by 0.4 per cent in the September quarter (2.5 per cent annual); the weighted median rose by 0.6 per cent (2.6 per cent annual) and the CPI less volatile items rose by 0.4 per cent (2.1 per cent annual). Overall, underlying inflation rose by 0.5 per cent in the quarter and around 2.4 per cent over the year.
• The Bureau of Statistics noted: “The most significant price rises this quarter were for fruit (+14.7 per cent), new dwelling purchase by owner-occupiers (+1.1 per cent), property rates and charges (+6.3 per cent) and other services in respect of motor vehicles (+5.8 per cent). These rises were partially offset by falls, for electricity (–5.1 per cent) and automotive fuel (–2.5 per cent).”
• Big movers: Electricity fell by 5.1 per cent in the quarter to be down 4.4 per cent over the year – marking the largest annual fall on record. Household textiles fell by a record 8.0 per cent over the year. Similarly personal care fell by a record 3.8 per cent over the year. Water charges fell by 0.6 per cent in the quarter to be up 0.4 per cent on a year ago – also a record low annual result. The price index of Women’s clothing was only 0.4 per cent higher that the lowest levels in 25 years.

What does it all mean?

• Parts of global economy continue to worry about the deflationary threat from sluggish growth and sliding oil prices. But here in Australia inflation is healthy without being excessive. In fact it is a Goldilocks situation – not too hot, not too cold, but just right!
• It is pretty clear that inflation is not a threat to the domestic economy, meaning that the Reserve Bank can comfortably keep interest rates at exceptionally low levels over the medium term. Domestic inflationary pressures remain well contained and given the slow growth in wages it is unlikely to result in a change to the domestic inflation landscape.
• Interestingly despite the 7 per cent slide in the Aussie dollar over the September quarter, it did not have a significant impact on lifting imported inflation – at least, not yet. It is likely that the substantial slide in the oil price will help to offset the depreciation in the currency. In fact the fall in the petrol price was one of the main contributors to the subdued inflation result.
• Whichever way you cut it, inflation is not a threat to the economy and the Reserve Bank will not be feeling any additional pressure to move rates in any direction any time soon.
• The headline inflation measure rose by a tame 0.5 per cent in the September quarter, and while some of the underlying measures were mildly weaker, the annual growth rates remain well within the Reserve Bank’s 2-3 per cent target band. The average of the three key underlying inflation measures lifted by 0.5 per cent in the quarter to be up 2.4 per cent over the year.
• Looking across the contributors to inflation. It was interesting that housing played a significant part. Not only did prices for new dwelling purchases lift by over 1 per cent but property and rates charges rose by over 6 per cent. Somewhat confusingly, utility charges (which tend to rise in the September quarter) fell in the latest reading. More than likely this is a function of the carbon tax repeal in July.
• The Reserve Bank will comfortably continue with its rhetoric of “interest rate stability”. More focus will be paid to labour market conditions and retail activity in coming months. CommSec expects rates to remain on hold over the rest of 2014 and perhaps well into 2015.

 

What do the figures show?

Consumer Price Index

• The All Groups Consumer Price Index (CPI) rose by 0.1 per cent in seasonally adjusted terms in the September quarter. In original terms the CPI index rose by 0.5 per cent in the September quarter. The annual rate of inflation fell from 3.0 per cent in the June quarter to 2.3 per cent in the September quarter.
• Underlying measures of inflation were marginally weaker in the September quarter. The weighted median measure rose by 0.6 per cent in the quarter, with the annual rate holding at 2.6 per cent. The trimmed mean measure rose by 0.4 per cent in the quarter with the annual rate falling from 2.8 per cent to 2.5 per cent. The CPI less volatile items rose by 0.4 per cent in the quarter to be up 2.1 per cent over the year.
• The Bureau of Statistics noted: “The most significant price rises this quarter were for fruit (+14.7 per cent), new dwelling purchase by owner-occupiers (+1.1 per cent), property rates and charges (+6.3 per cent) and other services in respect of motor vehicles (+5.8 per cent). These rises were partially offset by falls, for electricity (–5.1 per cent) and automotive fuel (–2.5 per cent)”.
• Prices of tradables rose by 0.3 per cent in the September quarter, with higher prices for fruit and tobacco. The most significant offsetting falls in the tradable goods component was for automotive fuel. The tradables component rose by 2.0 per cent over the year to September.
• Prices of non-tradables rose by 0.5 per cent in the September quarter. Price increases were recorded fornew dwelling purchase by owner-occupiers and increases in property rates and charges. The most significant offsetting fall was due to electricity and water charges. The annual rate of non-tradables inflation fell from 3.1 per cent to 2.4 per cent in the September quarter. Tradable goods are those items whose prices are largely determined on the world market. Non-tradable prices are more affected by domestic economic conditions.
• The Consumer Price Index (CPI) is regarded as Australia’s premier measure of inflation. The CPI is published quarterly and measures price changes for a ‘basket’ of goods and services that dominate expenditure of metropolitan households. The “All Groups” index is the main focus, but other inflation measures are also published such as so-called ‘underlying’ measures. These include measures that abstract from price changes in volatile price items such as fresh food and petrol.
• The Reserve Bank aims to keep the headline inflation rate between 2-3 per cent over an economic cycle. If inflation is high and expected to rise, the Reserve Bank may elect to raise interest rates in order to constrain price pressures. Conversely, if inflation is low and expected to remain low, the Reserve Bank may elect to cut interest rates if it believes the growth pace of the economy is in need of strengthening.
• At present inflation is very much under control; Overall the latest result is likely to see the Reserve Bank comfortably remain on the interest rate sidelines. CommSec believes that interest rates are likely to remain on hold over the rest of 2014.
• The key will be how the labour market evolves. CommSec expects labour market conditions to improve over the medium term, as a lift in economic activity translates through to a pickup in employment. As a result we expect rates to rise but not until well into 2015.

Why is the data important?

• The Consumer Price Index (CPI) is regarded as Australia’s premier measure of inflation. The CPI is published quarterly and measures price changes for a ‘basket’ of goods and services that dominate expenditure of metropolitan households. The “All Groups” index is the main focus, but other inflation measures are also published such as so-called ‘underlying’ measures. These include measures that abstract from price changes in volatile price items such as fresh food and petrol.
• The Reserve Bank aims to keep the headline inflation rate between 2-3 per cent over an economic cycle. If inflation is high and expected to rise, the Reserve Bank may elect to raise interest rates in order to constrain price pressures. Conversely, if inflation is low and expected to remain low, the Reserve Bank may elect to cut interest rates if it believes the growth pace of the economy is in need of strengthening.

What are the implications?

• At present inflation is very much under control; Overall the latest result is likely to see the Reserve Bank comfortably remain on the interest rate sidelines. CommSec believes that interest rates are likely to remain on hold over the rest of 2014.
• The key will be how the labour market evolves. CommSec expects labour market conditions to improve over the medium term, as a lift in economic activity translates through to a pickup in employment. As a result we expect rates to rise but not until well into 2015.