Consumer price index
- Inflation: The Consumer Price Index – the main measure of inflation in Australia – rose by 0.4 per cent in the September quarter, broadly in line with expectations. In seasonally adjusted terms the CPI rose by 0.1 per cent. The annual rate of headline inflation eased from 2.1 per cent to 1.9 per cent.
- 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 (1.8 per cent annual); the weighted median rose by 0.3 per cent (1.7 per cent annual) and the CPI less volatile items rose by 0.4 per cent (1.2 per cent annual). Overall, underlying inflation rose by 0.4 per cent in the quarter and by 1.6 per cent over the year. Market goods and services less volatile items was up by 0.5 per cent in the quarter to be up 1.1 per cent on the year.
- Main changes: International holiday travel and accommodation (+4.3 per cent), domestic holiday travel and accommodation (+2.4 per cent), tobacco (+1.8 per cent), and automotive fuel (+1.4 per cent). The most significant offsetting price falls this quarter are child care (-11.8 per cent), and telecommunications equipment and services (-1.5 per cent).
What does it all mean?
- The Reserve Bank Governor recently remarked on our good economic fortunes. And quite rightly. When was the last time that inflation was near 2 per cent with economic growth above 3 per cent, unemployment near 5 per cent and all this with interest rates at 1.5 per cent? So it is quite timely that this week’s The Economist magazine cover states “What Australia can teach the world”.
- The Reserve Bank won’t be touching interest rates any time soon. The Board’s preferred underlying inflation rate remains low and it is still struggling to get anywhere near the mid-point of the Board’s 2-3 per cent target. Reserve Bank Governor Philip Lowe says he would like to see inflation at a 2.5 per cent annual rate with wage growth at 3.5 per cent, but it may take a little more time to achieve this.
- The Reserve Bank expects underlying inflation of 1.75 per cent in the December quarter and then to hold between 2-2.25 per cent from March 2019 through to the end of the 2020 year. The Bank will revisit these forecasts in the next quarterly Statement on Monetary Policy on November 9. Certainly we aren’t expecting any major changes in forecasts.
- The bottom line is that the Reserve Bank can continue to “push the envelope” by leaving interest rates low despite economic growth exceeding the 2.75 per cent “speed limit”.
- The business sector has effectively been given a rate cut via the lower Australian dollar. And consumers have been given a de facto rate hike via higher petrol prices. Note however that global oil prices are now in retreat, so we need to watch this carefully.
- Three of the 11 CPI categories recorded deflation in the September quarter and three recorded deflation over the year. Wage growth is ahead of inflation and consumers are key winners from the strong retail competition occurring across the globe.
Craig James, Chief Economist