Australia's low inflation keeps rate hikes off the table, but price pressures are building in major cities

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  • Australia’s official inflation data came in slightly below expectations.
  • Based on the data, it remains unlikely the RBA will lift official interest rates any time soon.
  • However, Melbourne and Sydney are seeing evidence of price pressures.

Australia’s December quarter consumer price inflation (CPI) report has come in slightly below expectations, scuppering any near-term possibility of an interest rate increase from the Reserve Bank of Australia (RBA).

According to the Australian Bureau of Statistics (ABS), headline CPI rose by 0.6% during the quarter, missing expectations for an increase of 0.7%.

It saw the annual rate lift to 1.9%, above the 1.8% level of the September quarter but below forecasts for an acceleration to 2.0%.

“The most significant price rises this quarter [were for] automotive fuel (+10.4%), tobacco (+8.5%), domestic holiday travel and accommodation (+6.3%) and fruit (+9.3%),” the ABS said.

“These price rises were partially offset by falls in international holiday travel and accommodation (-1.7%), audio visual and computing equipment (-3.5%) and telecommunication equipment and services (-1.4%).”

This table from the ABS looks at both the quarterly and annual change in prices by category.

Source: ABS

Bruce Hockman, Chief Economist at the ABS, said that while headline inflation increased by 1.9% over the year across the entire economy, that masked significant variances in individual states and territories.

“While the annual CPI rose 1.9%, annual inflation in most East Coast cities rose above 2.0%, due in part to the strength in prices related to Housing,” he said.

“Softer economic conditions in Darwin and Perth have resulted in annual inflation remaining subdued at 1.0 and 0.8% respectively.”

So while headline inflation was soft from a national perspective, inflationary pressures were evident in Australia’s eastern states.

This next chart from the ABS shows the variance seen across the nation.

Source: ABS

The ABS said that tradables prices — those influenced by global factors — increased by 0.5% over the quarter with prices for goods lifting 0.7%, offsetting a decline of 1.7% for services.

Despite the quarterly increase, tradable prices fell by 0.3%.

Non-tradable prices — impacted by domestic factors — rose by 0.8% for the quarter, leaving the increase on a year earlier at 3.1%.

“The non-tradable goods component rose 1.4%, mainly due to tobacco (+8.5%) and new dwelling purchase by owner-occupiers (+0.6%),” the ABS said in relation to the quarterly result.

“The non-tradable services component rose 0.4%, mainly due to domestic holiday travel and accommodation (+6.3%) and insurance (+1.8%).”

So domestic inflationary pressures were reasonably strong on an annualised basis, only held back by prior weakness in globally-traded prices over the same period.

Underlying inflation, of more importance when it comes to the outlook for interest rates, increased by 0.42% over the quarter, below the 0.5% level expected.

That left the annual rate at 1.87%, marginally below the 1.89% level of the September quarter and expectations for an increase to 1.9%.

It was the ninth consecutive report that the annual underlying CPI rate came in below the RBA’s 2-3% inflation target.

Importantly, however, it was still above the RBA’s own year-end forecast for an annual increase of 1.75%.

While that ensures the prospect of rate cuts are still off the table, the small deceleration will raise questions as to whether underlying inflationary pressures are still building in the Australian economy at present.

Paul Dales, Chief Australia and New Zealand Economist at Capital Economics, said the result points to the likelihood that interest rates will be left unchanged throughout this year.

“The Q4 inflation figures were largely as expected, with the main message being that inflation is still just below the 2-3% target range and we think it will stay there,” he says.

“So despite the strength of the recent activity data, we still think the RBA won’t raise interest rates this year.”

Callam Pickering, APAC Economist for global job site Indeed, says today’s report snuffs out any near-term risk of higher official interest rates.

“The latest inflation report should put to bed any consideration of a near-term interest rate hike by the Reserve Bank,” he says.

“Despite an increase in the tobacco excise and higher fuel and utility prices, annual inflation once again failed to reach the bottom end of the RBA’s inflation target.”

In his opinion, Pickering says the key to any meaningful lift in inflationary pressures will be an increase in wage growth.

“We haven’t yet seen any improvement in wage growth and until that materialises inflation will continue its disappointing run,” he says.

“We see scope for an improvement in wage growth over 2018 due to the improvement in corporate earnings growth, as well as some firms reporting greater difficulty in finding workers.

“But given the persistent weakness in wage growth we’d prefer to see some evidence of improvement before the RBA considers hiking interest rates.”

The Australian dollar fell as much as 0.6% following the release of the report, indicating that traders now see a smaller chance that the RBA will lift rates this year.

Australian 3-year government bond futures reflect that view, strengthening as much as 8 ticks following the report’s release.

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