Australian inflation misses

(Photo by VCG/VCG via Getty Images)The famous inflatable duck by Dutch artist Florentijn Hofman being uninstalled after an appearance in Beijing.
  • Australian inflationary pressures remain weak, ensuring that official interest rate settings from the RBA are unlikely to change for the foreseeable future.
  • Headline CPI grew by 2.1% over the year, thanks primarily to increases in non-discretionary items.
  • Underlying CPI — key to official interest rate settings — decelerated over the same period, falling from 2.1% to 1.89%.

Australia’s June quarter consumer price inflation report (CPI) has come in below expectations.

According to the Australian Bureau of Statistics (ABS), headline CPI grew by 0.4% in the three months to June, leaving the increase on a year earlier at 2.1%.

Markets had been expecting a quarterly increase of 0.5%, seeing the year-on-year rate lift to 2.2%.

The quarterly rate marked the seventh consecutive report that CPI undershot economist expectations.

In the year to March, CPI grew by 1.9% — so price pressures have accelerated ever so slightly, although they are mainly found in a small number of product categories which are heavily influenced by government policy.

“Most of this annual growth is due to strength in fuel, electricity and tobacco,” said Bruce Hockman, Chief Economist at the ABS.

“Annual growth in prices of discretionary goods such as clothing and footwear, and furniture and household equipment remain subdued.”

This table from the ABS shows the breakdown of movements in each CPI category over the past quarter and year.

ABS

The largest price increases in the quarter came from automotive fuel (+6.9%), medical and hospital services (+3.1%), and tobacco (+2.8%).

In contrast, price declines were registered for domestic holiday travel and accommodation (2.7%), motor vehicles (2.0%) and vegetables (2.9%).

Demonstrating that most inflationary pressures are coming from areas linked to government, the “market goods and services ex volatile items index”, tracking private sector inflationary pressures, grew by just 0.2% over the quarter and 1.1% over the year.

This reading excludes volatile price movement for items such as utilities, property rates and charges, child care, health, urban transport fares, postal services and education, among other areas.

The annual rate was nearly half that recorded for headline CPI over the period.

In contrast to prior inflation reports, most of the price pressures were driven by offshore factors during the quarter, rather than domestic influences.

Tradable prices — accounting for around 40% of the CPI basket — grew by 0.5%, faster than the 0.3% increase in non-tradable items, accounting for the remainder of the basket.

However, over the year, it’s clear that of the inflationary pressures there were observed, most were domestically driven with non-tradable inflation lifting by 3%, or 10 times faster than non-tradables at 0.3%.

By individual state and territory, annual inflation ranged from 2.8% in Canberra to as low as 1.1% in Perth, partially reflecting divergent economic conditions across the country.

ABS

Underlying CPI — of more importance to official interest rate settings from the RBA — rose by 0.5% for the quarter after seasonal adjustments, seeing the year-on-year increase fall back to 1.89% from an upwardly-revised 2.1% increase in the prior quarter.

The result was in line with expectations, but fractionally below the 2% level forecast by the RBA back in May.

Given that underlying inflation decelerated in the year to June, it all but ensures the RBA cash rate — as it has been since August 2016 — will remain at 1.5% for the foreseeable future.

Reflecting the weak inflation report, the Australian dollar has fallen and government bond futures have strengthened, reflecting a reduced probability of an increase in the cash rate anytime soon.

Following today’s data, attention will now turn to the release of Australia’s wage price index (WPI) in mid-August. Previously, RBA Governor Philip Lowe has said sustained annual wage growth of around 3.5%, along with an improvement in productivity levels, will likely be required to lift underlying inflation back to the midpoint of its 2-3% target.

In the year to March, the wage price index grew by just 2.07%, hinting at the challenge still facing the RBA and other policymakers in attempting to boost inflationary pressures.

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