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Australian core inflation lowest in 3 years

Photo by Oli Scarff/Getty Images

Australian consumer price inflation (CPI) ticked higher in the December quarter with the ABS reporting an increase of 0.4%.

The figure, above the 0.3% increase expected, left the annual rate at 1.7%, up 0.2% on the figure reported in Q3 2015.

In original terms, tradable inflation – that largely determined by global markets – increased by 0.5%, leaving the annual rate up 0.8%.

Non-tradable inflation, or domestic-orientated inflation, rose by 0.4%, taking the annual increase to 2.3%.

The tradable component makes up 40% of the ABS’ CPI basket with non-tradables accounting for the remaining 60%.

According to the ABS, the most significant price increases during quarter were in tobacco (+7.4%), domestic holiday travel and accommodation (+5.9%) and international holiday travel and accommodation (+2.4%).

Partially offsetting those increases, there were significant price declines recorded for automotive fuel (–5.7%), telecommunication equipment and services (–2.4%) and fruit (–2.6%).

As opposed to past inflation reports, there was also a significant deceleration in housing-related inflation.

Rents increased by 0.2%, shading a 0.1% rise in new dwelling prices for owner occupier buyers. The uptick in the latter was the weakest since the March quarter of 2014, fitting with other housing-related data released during the quarter.

In overall terms housing-related inflation rose by just 0.1%, the weakest level seen since the March quarter of 1998.

The full breakdown of price movements by group can be found in the chart below, supplied by the ABS.

Source: ABS

While headline inflation accelerated modestly, it was a different story for the all-important core CPI figure watched closely by financial markets.

For the quarter it rose 0.55%, fractionally above the 0.5% increase expected, although from a year earlier it decelerated to just 2.0%.

Not only did it miss forecasts for a decline to 2.1%, it was also the slowest annual increase seen since the June quarter of 2012.

At 2.0%, the core inflation reading now sits at the bottom of the RBA’s 2-3% inflation target band. While this does not guarantee that the RBA will cut interest rates further, it leaves the door wide open to further easing should the need for additional monetary policy stimulus be required.

Whether due to the uptick in the quarterly core inflation rate, or the fact that another subdued inflation reading was all but expected by markets, the Australian dollar has strengthened modestly on the news, rising from a low of .6993 to as high as .7040 in the minutes following the the CPI release. It currently buys .7033.

Cash rate futures have also strengthened, indicating a smaller probability that the RBA will cut interest rates in February. They currently price the likelihood of a 25bps rate cut at just 6%, down from 21% earlier in the session.

Despite the lower probability of a near-term rate cut, Australian stocks have halved their early session losses. The ASX 200 currently sits down 0.39%.

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