Consumer price index
- Low inflation: The Consumer Price Index – the main measure of inflation in Australia – rose by 0.4 per cent in the June quarter, in line with expectations. In seasonally adjusted terms the CPI rose by 0.6 per cent. The annual rate of inflation fell from 1.3 per cent to 1.0 per cent – equalling the low set in June 1999. So inflation stands at a 17-year low.
- 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 June quarter (1.7 per cent annual); the weighted median rose by 0.4 per cent (1.3 per cent annual) and the CPI less volatile items rose by 0.3 per cent (1.6 per cent annual). Overall, underlying inflation rose by 0.4 per cent in the quarter and by 1.53 per cent over the year – a record low.
- Main changes: Petrol prices rose by 5.9 per cent in the quarter with medical and hospital services up by 4.2 per cent, tobacco up by 2.1 per cent and new dwelling purchase up 0.9 per cent. The CPI was dragged lower by a 3.7 per cent fall in domestic holiday costs, a 1.3 per cent fall in car prices and 1.5 per cent fall in telecom equipment and services.
- Notable changes: Education fees rose 3.3 per cent over the year – the slowest growth on record. A raft of goods fell at a record annual rate including breakfast cereals, wine, snacks & confectionary and communication.
What does it all mean?
- Price pressures are contained. Clearly this is not a new development and certainly not one confined to Australia. Consumers can buy goods anywhere and anytime with internet purchases transforming businesses across the globe. Competition is keeping downward pressure on prices and margins and causing businesses to look first at cutting costs before opting to lift prices. And disruption is adding to the competitive forces – developments like Airbnb and Uber are challenging mainstream industries and businesses.
- Inflation is stubbornly below the Reserve Bank’s 2-3 per cent target band. And importantly it is unlikely the Bank will look to revise the target any time soon. The only way that the Reserve Bank can seek to lift the inflation rate to the target band is by running the economy at a faster rate and that means cutting interest rates. So a rate cut will be on the agenda at the Reserve Bank Board meeting next Tuesday. Will a rate cut actually boost growth? It is far from certain, but the Reserve Bank has to try. But the Reserve Bank won’t continue to cut rates if it’s clear that interest rates at super-low levels have become ineffective in boosting demand.
- Before yesterday’s data the Reserve Bank had assumed an annual headline CPI result near 1 per cent in the June quarter with the underlying rate at 1.5 per cent. Those forecasts have been realised. But the Reserve Bank had tipped inflation to stay locked between 1.5-2.5 per cent over the next two years. So even before the latest data the Reserve Bank held open the possibility of a rate cut with inflation expected to remain at or below the bottom end of its 2-3 per cent target range.
- Low inflation isn’t confined to certain parts of the economy – it is very much an economy-wide phenomenon. In fact the core measure of market-determined services (excludes volatile items) actually fell by 0.2 per cent in the quarter. It’s not just goods but also services that are getting cheaper. Consumers are kings and queens in the current environment.
What do the figures show?
Consumer Price Index
- The All Groups Consumer Price Index (CPI) rose by 0.4 per cent in the June quarter, broadly in line with expectations. In seasonally adjusted terms the CPI rose by 0.6 per cent. The annual rate of inflation fell from 1.3 per cent to 1.0 per cent – equalling the low set in June 1999. So inflation stands at a 17-year low.
- Underlying measures of inflation were generally in line with forecasts in the June quarter. The trimmed mean rose by 0.5 per cent in the June quarter (1.7 per cent annual); the weighted median rose by 0.4 per cent (1.3 per cent annual) and the CPI less volatile items rose by 0.3 per cent (1.6 per cent annual). Overall, underlying inflation rose by 0.4 per cent in the quarter and by 1.53 per cent over the year – a record low.
- The Bureau of Statistics noted: “The most significant price rises this quarter are medical and hospital services (+4.2 per cent), automotive fuel (+5.9 per cent), tobacco (+2.1 per cent) and new dwelling purchase by owner-occupiers (+0.9 per cent). The most significant offsetting price falls this quarter are domestic holiday travel and accommodation (-3.7 per cent), motor vehicles (-1.3 per cent) and telecommunication equipment and services (-1.5 per cent).”
· Prices of tradables rose by 0.6 per cent in the June quarter with higher petrol prices offsetting low car prices. The tradables component of consumer prices was unchanged in the year to June.
· Prices of non-tradables rose by 0.4 per cent in the June quarter. Price increases were recorded for new dwelling purchase and hospital and medical services. The most significant offsetting fall was for domestic holiday travel and accommodation. Non-tradables prices rose by 1.6 per cent in the year to June. Tradable goods are those items whose prices are largely determined on the world market. Non-tradable prices are more affected by domestic economic conditions.
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?
· CommSec expects the Reserve Bank to cut the cash rate next week by 25 basis points or a quarter of a per cent to 1.75 per cent.
· At the Reserve Bank website, four measures of inflation are represented – the headline rate of inflation and three underlying measures. All four are important. The headline inflation rate is at 17-year lows. The average underlying rate is 1.53 per cent – the lowest result in data extending back to 1983. It is clear that little stands in the way of the Reserve Bank cutting rates again.
· There are no inflationary pressures. Businesses will need to continue to look at cost and productivity savings to keep prices low or drive prices even lower.