Underlying inflation at a 31-year high

Consumer Price Index

•  The main measure of inflation in Australia – the Consumer Price Index (CPI) – rose by 1.8 per cent in the June quarter (consensus: +1.9 per cent). The annual rate of the CPI rose from 5.1 per cent to 6.1 per cent – equalling the annual rate in June quarter 2001. Inflation was last higher than 6.1 per cent, 32 years ago in the June quarter 1990.
• The most significant price rises in the June quarter were for New dwelling purchase by owner-occupiers (+5.6 per cent), Automotive fuel (+4.2 per cent) and Furniture (+7.0 per cent).
• The ‘underlying’ or trimmed mean CPI rose by 1.5 per cent in the quarter (consensus: +1.5 per cent) with the annual growth rate lifting from 3.7 per cent to 4.9 per cent (consensus: 4.7 per cent). Based on RBA data, it was the highest annual rate of trimmed mean inflation in 31 years (June quarter 1991).

 What does it all mean?

• Inflation was broadly in line with expectations in the June quarter. A cause for celebration? Hardly, still it is encouraging that headline inflation is well below levels experienced in the US, UK, Euro zone and Canada.
• What is notable is the role that higher fuel prices are having, both directly at the petrol pump, as well as via higher freight or transport costs. And if Covid and the Ukraine war weren’t enough in lifting prices, Australia has had to contend with “heavy rain and flooding” events that boosted the cost of vegetables.
• Still, the flood impact won’t lead to on-going price increases. Supply will lift over time to meet the level of demand. And if oil prices settle, there won’t be justification for second-round on ongoing increases in pump prices or transport costs. The Reserve Bank will also hope that services inflation will ease as interest rates rise and continue to be segregated from higher prices of physical goods.
• All countries are dealing with the highest inflation rates in decades and Australia is no exception. Workers keep succumbing to Covid or influenza, restraining production of goods. At the same time, the war in Ukraine is lifting prices of a range of commodities, notably oil. In response, central banks are trying to quickly lift interest rates to ‘normal’ levels – both to restrain spending or demand for goods but also to prevent inflation expectations ramping higher.
• Clearly it is a difficult balancing act for central banks – to slow, not stall economies, and to get the inflation genie back in the bottle. And while the inflation challenge is global – the Reserve Bank also has to deal with the inflationary effects of strong construction activity and a tight job market.
• Overall, the Reserve Bank (RBA) has no alternative but to lift rates to a more neutral (less stimulatory) setting. The RBA thinks this is a cash rate near 2.5 per cent. Commonwealth Bank (CBA) Group economists expect 50 basis point hikes to be delivered in August and September and a 25 basis point move later in 2022. We expect that a cash rate of 2.6 per cent will be successful in getting inflation under control to the extent where interest rate cuts will be contemplated later in 2023.
• The annual headline rate of inflation is unlikely to peak until the December quarter 2022 at 6¾ per cent, so the Reserve Bank must remain vigilant for some time yet.

What do you need to know?

• Overall result: The Consumer Price Index (CPI) rose by 1.8 per cent in the June quarter (consensus: +1.9 per cent). The annual rate of the CPI rose from 5.1 per cent to 6.1 per cent – equalling the annual rate in June quarter 2001.  (The seasonally adjusted measure rose from 5.2 per cent to 6.1 per cent).
• Underlying measures: The ‘underlying’ or trimmed mean CPI rose by 1.5 per cent in the quarter (consensus: +1.5 per cent) with the annual growth rate lifting from 3.7 per cent to 4.9 per cent (consensus: 4.7 per cent). It was the highest annual rate of trimmed mean inflation in 31 years (June quarter 1991).
• The weighted median inflation measure rose by 1.4 per cent in the June quarter (+4.2 per cent annual). The CPI less volatile items rose by 1.6 per cent (5.3 per cent annual). Market goods and services less volatile items rose by 2.1 per cent in the quarter to be up 6.1 per cent on the year.
• Capital cities CPI: Sydney +1.6 per cent in the quarter (annual +5.3 per cent); Melbourne +1.8 per cent (+6.1 per cent); Brisbane +2.1 per cent (+7.3 per cent); Adelaide +2.1 per cent (+6.4 per cent); Perth +1.7 per cent (+7.4 per cent); Hobart +1.8 per cent (+6.5 per cent); Darwin +2.1 per cent (+6.6 per cent); Canberra +6.3 per cent (+5.4 per cent).
• Goods accounted for 79 per cent of the rise in the CPI this quarter, reflecting high freight costs, supply constraints and prolonged strong demand.
• Tradables rose 2.7 per cent in the quarter, +8.0 per cent annual.
• Tradable goods rose 2.6 per cent due to Automotive fuel (+4.2 per cent), Furniture (+7.0 per cent) and Vegetables (+7.3 per cent).
• Tradable services rose 6.3 per cent due to International holiday travel and accommodation (+19.9 per cent).
• Non–tradables rose 1.4 per cent in the quarter, +5.3 per cent annual.
• Non-discretionary goods and services rose 1.8 per cent through the quarter, and 7.6 per cent through the year.
• Discretionary goods and services rose 1.7 per cent through the quarter, and 4.0 per cent through the year.

 

  

Notable price changes:

• The Australian Bureau of Statistics noted:
• “The most significant contributors to the rise in the June quarter CPI were new dwellings (+5.6 per cent) and automotive fuel (+4.2 per cent).
• “Shortages of building supplies and labour, high freight costs and ongoing high levels of construction activity continued to contribute to price rises for newly built dwellings. Fewer grant payments made this quarter from the Federal Government’s HomeBuilder program and similar state-based housing construction programs also contributed to the rise,” said Ms Marquardt.
• “The CPI’s automotive fuel series reached a record level for the fourth consecutive quarter. Fuel prices rose strongly over May and June, following a fall in April due to the fuel excise cut.”
• The ABS also noted higher fuel prices “rose due to global sanctions on Russian oil, paired with ongoing easing of COVID–19 restrictions strengthening global demand.”
• The price of goods (+2.6 per cent) continued to rise more strongly than that of services (+0.6 per cent). Notable rises were recorded across the food group (+2.0 per cent) and the furnishings, household equipment and services group (+2.5 per cent). Main contributors to the rise in food prices included vegetables (+7.3 per cent), meals out and takeaway foods (+1.4 per cent), and fruit (+3.7 per cent). Supply chain disruptions due to flooding events, labour shortages, and rising freight costs contributed to higher prices. Furniture prices rose (+7.0 per cent) due to increased transport and material costs, and stock shortages.
• Services recorded a smaller rise compared with goods. Financial services (+1.2 per cent) and holiday travel and accommodation (+2.3 per cent) rose. Child care (-7.3 per cent) fell as the full effect of additional child care subsidies for families with two or more children under the age of 6, which commenced on 7 March, flowed through into this quarter. Before and after school care vouchers offered by the NSW Government also contributed to the fall in child care costs. Urban transport fares (-4.4 per cent) fell due to free travel periods introduced by the NSW and Tasmanian State Governments within the quarter.

On underlying inflation:

• “Trimmed mean inflation increased to 1.5 per cent over the quarter and 4.9 per cent over the year. The price of goods (+8.4 per cent) continued to rise more strongly through the year than that of services (+3.3 per cent).
• “Annual trimmed mean inflation was the highest since the series commenced in 2003 and annual goods inflation was the highest since 1987, as the impacts of supply disruptions, rising shipping costs and other global and domestic inflationary factors flowed through the economy.”