Inflation: No room for complacency

Consumer price index

•  Inflation: The Consumer Price Index – the main measure of inflation in Australia – rose by 0.5 per cent in the December quarter, above expectations. In seasonally adjusted terms the CPI rose by 0.4 per cent. The annual rate of headline inflation eased from 1.9 per cent to 1.8 per cent. The Aussie dollar rose a quarter of a cent against the greenback in response.
• 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 December quarter (1.8 per cent annual); the weighted median rose by 0.4 per cent (1.7 per cent annual) and the CPI less volatile items rose by 0.6 per cent (1.6 per cent annual). Overall, underlying inflation rose by 0.4 per cent in the quarter and by 1.75 per cent over the year. Market goods and services less volatile items was up by 0.7 per cent in the quarter to be up 1.7 per cent on the year.
• Main changes: domestic holiday travel and accommodation (+6.2 per cent), fruit (+5.0 per cent), tobacco (+9.4 per cent) and new dwelling purchase by owner-occupiers (+0.4 per cent) The most significant offsetting price falls this quarter are automotive fuel (-2.5 per cent), audio visual and computing equipment (-3.3 per cent), wine (-1.9 per cent) and telecommunications equipment and services (-1.5 per cent).

What does it all mean?

• Consumer prices rose a touch higher than expected in the December quarter. And while growth rates of 0.4-0.5 per cent for the quarter are still modest outcomes, market goods and services printed at a relatively high growth rate of 0.7 per cent for the quarter. There are no immediate implications other than interest rates remain on hold. But the Reserve Bank will likely stick to its guns, saying the next move in rates is up as a tighter job market manifests in higher wages and prices over time.
• Over the past decade underlying inflation has averaged 2.4 per cent and inflation has averaged 2 per cent over the past five years. The goal of the Reserve Bank is to keep inflation in the 2-3 per cent target band over the medium term. So the Reserve Bank has met its objective. Today’s data confirms that inflation is contained for now, so interest rates don’t need to move in any direction. For future interest rate settings it depends on where inflation is headed. And the best guess is that underlying inflation will move modestly higher. The job market is tightening, wages are starting to tick higher and the weaker Aussie dollar has the potential to show up in the prices of imported goods.
• Before today the Reserve Bank had expected underlying inflation to be 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 February 8. Certainly we aren’t expecting any major changes in forecasts.
• With inflation still low and expected to lift only modestly over time, the Reserve Bank can continue to “push the envelope” by leaving interest rates well below the “neutral” or “normal” level. Monetary conditions – including interest rates and the Aussie dollar – remain stimulatory, and there are few risks in maintaining current settings.
• Wages are growing at a 2.3 per cent annual rate (2.7 per cent including bonuses) so the real winners in the current environment are Aussie consumers. A raft of goods has become more affordable with wages outpacing prices.