Australian inflationary pressures were weak again in the final quarter of 2017, continuing the pattern seen over the last two years.
According to the Australian Bureau of Statistics (ABS), headline consumer price inflation (CPI) rose by 0.6%, 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%.
Underlying inflation, of more importance when it comes to the outlook for Australian interest rates, was even weaker than the headline number, increasing by 0.42% over the quarter, below the 0.5% level expected.
That saw the annual rate come in at 1.87%, marginally below the 1.89% level of the September quarter and market expectations for an increase to 1.9%.
While higher than the RBA’s own year-end forecast of 1.75%, it was the ninth consecutive CPI report where annual underlying CPI rate came in below the bank’s 2-3% inflation target.
Following the release of the report, the Australian dollar fell and Australian government bond futures rallied, indicating a lower probability that the RBA will lift interest rates in the short-term, at least in the minds of traders.
Now that the markets have spoken, it’s time to see what Australia’s economic community think of the report.
Are rate hikes off the table for the foreseeable future, or was there something in the data to suggest that inflationary pressures are building, paving the way for the first increase in official interest rates since late 2010?
Let’s find out, starting with Ben Jarman, Economist at JP Morgan, who wins the award for the most creative headline following the CPI report’s release: “Fuel not sufficient to set Australian inflation alight”.
Ben Jarman, JP Morgan
The Australian CPI reading for Q4 was weak, despite the anticipated support from very large increases in volatile items such as fresh food, fuel, and tobacco being realised.
Given the temporary spikes in a few groups, we had expected today’s result to be something of a head-fake and distraction from the very weak underlying trend in core inflation. But not even the bump from the volatile items measured above — in sum adding 0.65%-pt to inflation — could cause a stir, given the broad drags from zero unit labour cost growth, margin compression, a fading housing cycle and a rising real exchange rate.
The diffusion index measuring the proportion of basket items running below the bottom of the RBA’s 2-3% target band rose to 67% in Q4, back to the all-time highs. This supports our view that the RBA is unlikely to be hiking any time soon.
Joanne Masters, ANZ Bank
The Q4 inflation print was a touch below expectations for headline, but in line with our expectations for core. Overall, it was a solid result, particularly given the drag from the re-weighting.
There were few surprises in the data, with headline boosted by fuel, tobacco, domestic travel and fruit. Retail competition was still evident with a range of retail prices falling in the quarter.
Overall the data suggests that inflationary pressures have stabilised just below the policy band and should rise gradually over time. We see this data as consistent with our view that the RBA will look to raise rates this year, with a focus on bringing the real cash rate back to zero.
We continue to look for the first of two rate hikes in May, although this is based on our forecast that the wage price index prints a 0.5% quarterly rise for Q4 [when released in late February].
Kristina Clifton, Commonwealth Bank
The RBA will have the chance to give their perspective on today’s CPI outcome, and other recent economic trends, in the statement accompanying the Board meeting next Tuesday and the quarterly Statement on Monetary Policy on Friday next week.
We expect the RBA will be comfortable with today’s outcome as it broadly lines up with their projections for both headline and underlying inflation.
Since the last Board meeting in early December the economic data has largely come in on the stronger side. In particular, jobs growth remains very strong, which provides support for the view that wages growth will start to pick up gradually.
All in all there is nothing in today’s outcome or the recent economic data to change our view that the cash rate is on hold until late this year.
Callam Pickering, Indeed
The latest inflation report should put to bed any consideration of a near-term interest rate hike by the Reserve Bank. 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.
Core inflation – the RBA’s preferred measure of inflation – remained weak in the December quarter. However, we continue to see some evidence of inflationary pressures coming from domestic factors, including housing and utilities, with inflation on non-tradable goods rising by 3.1% over the past year.
But global factors continue to put downward pressure on Australian consumer prices. Inflation on tradable goods fell by 0.3% over the year past year and we expect that to continue if the Aussie dollar maintains its recent strength.
The key for inflation remains wages. We haven’t yet seen any improvement in wage growth and until that materialises inflation will continue its disappointing run. 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.
Paul Dales, Capital Economics
It is possible that price pressures are a little stronger than the CPI data for the fourth quarter suggest. But the main message is that inflation is still hovering just below the 2-3% target and it will probably stay there for another year or two.
Underlying prices rose by 0.4%, which left the annual rate of underlying inflation at 1.9%. This is above the low of 1.4% in mid-2016, but it has now been below the 2-3% target for two years. And the six-month annualised growth rate, which tells us more about the latest trends, has fallen back to 1.6%.
We don’t think the RBA will be too worried by this as there are two reasons why underlying price pressures may be a little stronger than these data suggest. First, the weaker-than-usual changes in the prices of clothing, furniture and household appliances in the fourth quarter may be due to larger-than-usual discounting around Black Friday and ahead of Christmas. Retailers may then have cut prices by less in January. Second, the fourth-quarter data are calculated from the new spending weights, which will have put some downward pressure on the CPI as the weights fell of some items that have risen rapidly in price.
That said, the full downward influence of the new weights will only be clear after another three quarters. And there is little reason to expect underlying inflation to rise much if wage growth stays low, as we expect, and if the dollar stays strong which is less likely. The bottom line is that the inflation outlook means the RBA won’t be in a rush to raise interest rates.
Su-Lin Ong, RBC Capital Markets
The suite of core inflation measures continues to highlight limited price pressures. Core inflation has troughed but is showing limited signs of momentum. Looking forward, we see little reason for any acceleration given continued tepid wages growth and annual unit labour cost growth which has averaged around flat for the last few years. Considerable excess capacity in both goods and labour markets will need to be absorbed before higher sustained core inflation emerges. We expect core inflation to remain below the RBA’s 2% floor until late 2018.
For the RBA, confirmation of below target inflation for the ninth consecutive quarter will not be a surprise with the core measures broadly in line with their 1.75% forecast. It suggests little change to its inflation and key macro forecasts in next week’s Statement on Monetary Policy (SoMP), although we expect upcoming RBA communication to be upbeat and optimistic in line with its global counterparts.
While the RBA is also likely to think we are past the low point in inflation for this cycle, they are unlikely to signal policy normalisation until they are more confident that core inflation is heading back within target. In particular, this will demand continued strong employment growth and some downward pressure on underutilisation together with firmer wages growth and higher unit labour costs. This still looks some way off despite the stronger labour market.
Patience is still the most prudent option especially given a number of other headwinds including a softening housing market, cautious and indebted households and stronger currency. Accordingly, we expect the RBA to remain on the sidelines in what is likely to become an unusually long period of steady cash at 1.50%.
Sarah Hunter, BIS Oxford Economics
There is little sign of underlying inflationary pressures building up, with the trimmed and weighted means both holding steady at 1.8% and 1.9% respectively. Global inflationary pressures remain subdued, and although the labour market had a spectacular 2017 wages growth is still very weak and likely to remain subdued for some time yet.
This will keep the RBA on hold for some time yet, likely until the end of 2019. The economy is building momentum slowly, and they won’t want to risk derailing this with an early rate hike.
Shane Oliver, AMP Capital
The continuing low inflation backdrop means that there is little chance of an imminent RBA interest rate hike. Headline and underlying inflation is still below the RBA’s inflation target of 2-3% and is expected to remain there for a while yet.
While there are areas of strength in the Australian economy — the labour market is strong, business confidence is high and consumer sentiment is lifting, strong commodity prices are good for export income — the low inflation and wages backdrop, risks around home prices and high household debt and the high Australian dollar all indicate that it’s still too early for the RBA to start raising interest rates.
We remain of the view that the RBA won’t start lifting rates until late this year, starting with a 0.25% rate rise.
Ivan Colhoun, National Australia Bank
Overall, we think RBA will be happy that inflation not that far off 2%. The RBA won’t be worried at all about inflation break-out given wages remain slow and spare capacity remains in the labour market in the form of unemployment above NAIRU and elevated underemployment.
This suggests the RBA has room to allow economy to run for a while longer to lower unemployment further, [making it] hard to tighten in [the first half of 2017].
That said, don’t think low inflation will drive any serious thoughts of easing, given global economy recovering and housing has only recently moderated.
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