Australian inflationary pressures are slowly starting to build

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  • Australian inflationary pressures look like they’re slowly starting to build.
  • According to the ABS, annual growth in underlying inflation rose to 2.0% in early 2018, the fastest increase in over two years.
  • Underlying inflation is above the RBA’s forecasts, and could see the bank begin to lift interest rates sooner than markets currently anticipate.

Australian inflationary pressures look like they’re slowly starting to build.

According to the Australian Bureau of Statistics (ABS), headline consumer price inflation (CPI) rose by 0.4% in the three months to March, missing forecasts for a larger increase of 0.5%.

That left annual CPI steady at 1.9%, again, one-tenth below the level expected.

“The most significant price rises this quarter are secondary education (+3.3%), gas and other household fuels (+6.0%), pharmaceutical products (+5.6%), vegetables (+3.7%) and medical and hospital services (+1.5%),” the ABS said.

“These price rises were partially offset by falls in international holiday travel and accommodation (-2.4%), audio, visual and computing media and services (-6.1%) and furniture (-2.8%).”

This table from the ABS shows the percentage change by category both over the March quarter and past year.

Source: ABS

The ABS said tradable prices — largely determined by offshore factors — fell 0.4% over the quarter, leaving the decline on a year earlier at 0.5%.

“The tradable goods component fell 0.2% mainly due to audio, visual and computing media and services (-6.1%), furniture (-2.8%) and audio, visual and computing equipment (-2.9%),” the ABS said. “The tradable services component fell 2.2% due to international holiday travel and accommodation (-2.4%).”

In comparison, non-tradable prices — largely influenced by domestic factors — jumped by 0.8% during the quarter, leaving the increase over the year at 3.1%.

“The non-tradable goods component rose 0.9%, mainly due to pharmaceutical products (+5.6%), beer (+2.0%) and electricity (+1.8%),” the ABS said. “The non-tradable services component rose 0.9%, mainly due to secondary education (+3.3%) and medical and hospital services (+1.5%).”

However, while headline inflation was capped by weakness in tradable inflation, underlying CPI — of more importance when it comes to the outlook for Australian interest rate settings — rose by 0.52% over the quarter in seasonally adjusted terms, leaving the increase on a year earlier at 1.98%, well above the 1.85% level expected by economists.

Underlying inflation, or core inflation, strips out volatile price movements in the CPI survey, providing a cleaner read on underlying trends in price pressures.

The annual increase was the fastest since the December quarter of 2015, rebounding slowly after bottoming at 1.5% in the final quarter of 2016.

Importantly, the lift in underlying inflationary pressures is occurring faster than what the Reserve Bank of Australia (RBA) was expecting. Based on the bank’s latest forecasts issued in February, it saw underlying inflation sitting at just 1.75% by the end of the June quarter this year.

Clearly, it’s been a little stronger than that, moving back to within a whisker of re-entering the RBA’s 2-3% annual inflation target. Based on its latest forecasts, the RBA wasn’t expecting underlying CPI to do that convincingly until the middle of 2020.

Adding to signs that inflationary pressures are building, the ABS said weakness in the headline CPI was largely driven by soft price pressures in Australia’s mining capitals, masking far stronger outcomes in Australia’s eastern states.

“While the annual CPI rose 1.9%, most East Coast cities have continued to experience annual inflation above 2.0%, due in part to the strength in prices related to Housing and Food,” said Bruce Hockman, Chief Economist for the ABS.

“Softer economic conditions in Darwin and Perth have resulted in annual inflation remaining subdued at 1.1 and 0.9 per cent respectively.”

This table from the ABS reveals the wide discrepancy in price pressures seen across Australia’s capital cities over the past year.

Source: ABS

Despite the hotter-than-expected underlying inflation read for the March quarter, along with signs that inflationary pressures are starting to build in Australia’s largest cities, Paul Dales, Chief Australia and New Zealand Economist at Capital Economics, says it’s still unlikely to be enough to see the RBA begin to lift interest rates this year.

“Even though underlying CPI inflation rose in Q1 to the bottom of the RBA’s 2-3% target for the first time in two years, we doubt this means that the RBA will raise interest rates this year,” he says.

“With GDP growth unlikely to accelerate much this year and slack in the labour market restraining wage growth, we doubt that underlying inflation will rise much further.

“It may yet fall back below 2%.”

However, with underlying inflation now back to the bottom of the RBA’s target, the odds of the RBA lifting interest rates this year have surely increased following the release of today’s report.

One suspects that Australia’s March quarter wage price index — released on Wednesday, May 16 — will play a crucial role in determining whether such an outcome is likely.

It’s a lead indicator on inflationary pressures, and, like CPI, it too appears to have already bottomed.

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