Tame inflation! Rate cut on the cards

Consumer price index

• Tame inflation: The Consumer Price Index – the main measure of inflation in Australia – rose by 0.2 per cent in the March quarter, in line with expectations. In seasonally adjusted terms the CPI rose by 0.3 per cent. The CPI stands 1.3 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 0.6 per cent in the March quarter (2.3 per cent annual); the weighted median rose by 0.6 per cent (2.4 per cent annual) and the CPI less volatile items rose by 0.7 per cent (2.3 per cent annual). Overall, underlying inflation rose by 0.6 per cent in the quarter and around 2.3 per cent over the year.
• The Bureau of Statistics noted: “The most significant price rises this quarter were for holiday travel and accommodation (+3.5 per cent), tertiary education (+5.7 per cent) and medical and hospital services (+2.2 per cent). These rises were partially offset by falls, for automotive fuel (–12.2 per cent), and fruit (–8.0 per cent).”
• Big movers: The price index of Women’s clothing was 2.6 per cent lower than a year ago, with the index at the lowest levels in 26 years. The price index for audio visual equipment (including TV’s) was at the lowest level on record. The price index for small electrical household items was also holding at the lowest levels in 26 years.

What does it all mean?

• Inflation remains healthy without being excessive. In fact the economic environment in Australia is far different from some other parts of the globe. The euro zone continues to worry about the deflationary threat from sluggish growth and sliding oil prices, while inflation remains below the Fed’s target rate in the US. But here in Australia inflation is holding at the low end of the Reserve Bank’s target 2-3%.
• 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.
• The headline inflation measure rose by a tame 0.2 per cent in the March quarter, and while some of the underlying measures were mildly higher, the annual growth rates remain within the low end of the Reserve Bank’s 2-3 per cent target band. The average of the three key underlying inflation measures lifted by 0.6 per cent in the quarter to be up 2.3 per cent over the year.
• Interestingly despite the sharp slide in the Aussie dollar over the March quarter, did not have a significant impact on lifting imported inflation – at least, not yet. The tradeable component of the CPI result fell by 1.2% in the March quarter. The substantial slide in the oil price continues 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.
• Looking across the contributors to inflation. The seasonal lift in education and domestic accommodation were amongst the key drivers of any lift in inflation while the fuel price recorded a 12.2 per cent decline in the March quarter. Whichever way you cut it, inflation is not a threat to the economy.
• Despite the mildly higher than expected readings on underlying measures the Reserve Bank can comfortably ignore inflation and discuss merits of another interest rate cut on the economy. Policymakers will focus more attention on the labour market, shifts in the Aussie dollar and retail activity in coming months. CommSec expects the Reserve Bank to cut the cash rate to a historical low of 2.00 per cent in May.

What do the figures show?

Consumer Price Index

• The All Groups Consumer Price Index (CPI) rose by 0.3 per cent in seasonally adjusted terms in the March quarter. In original terms the CPI index rose by 0.2 per cent in the March quarter. The annual rate of inflation fell from 1.7 per cent in the December quarter to 1.3 per cent in the March quarter.
• Underlying measures of inflation were marginally higher than forecasts in the March quarter. The weighted median measure rose by 0.6 per cent in the quarter, with the annual rate lifting from 2.3 per cent to 2.4 per cent. The trimmed mean measure rose by 0.6 per cent in the quarter with the annual rate rising from 2.2 per cent to 2.3 per cent. The CPI less volatile items rose by 0.7 per cent in the quarter to be up 2.3 per cent over the year.
• The Bureau of Statistics noted: “The most significant price rises this quarter were for holiday travel and accommodation (+3.5 per cent), tertiary education (+5.7 per cent) and medical and hospital services (+2.2 per cent). These rises were partially offset by falls, for automotive fuel (–12.2 per cent), and fruit (–8.0 per cent).”
• Prices of tradables fell by 1.2 per cent in the March quarter, with lower prices for automotive fuel. The most significant offsetting rise in the tradable goods component was for pharmaceutical products, vegetables and tobacco. The tradables component fell by 0.9 per cent over the year to March.
• Prices of non-tradables rose by 1.0 per cent in the March quarter. Price increases were recorded for new dwelling purchase by owner-occupiers and electricity. The most significant offsetting fall was for bread. The annual rate of non-tradables inflation rose from 2.3 per cent to 2.6 per cent in the March 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 discuss the merits of another rate cut at the upcoming May meeting. CommSec believes that the cash rate will be cut by 25 basis points to a historical low of 2 per cent in May.

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 discuss the merits of another rate cut at the upcoming May meeting. CommSec believes that the cash rate will be cut by 25 basis points to a historical low of 2 per cent in May.