Australia’s September quarter consumer price inflation report (CPI) is about to be released.
Arriving just four times a year, it’s arguably the most important data release on the Australian economic calendar, especially when it come to the outlook for official interest rate settings.
While it has undoubtedly lost some of its clout in recent years, seemingly taking a backseat to financial stability concerns at the Reserve Bank of Australia (RBA) under the leadership of Philip Lowe, it still carries the potential to move interest rate expectations in an instant.
No matter how you describe it, be it low, soft, weak or below target, inflationary pressures have been close to non-existent since early 2016, sitting at or below 2% for much of that period, reflecting similar outcomes abroad as well as elevated unemployment and sluggish economic growth domestically, at least up until recently.
Despite improvement on those fronts over the past year, another weak inflationary print is expected to arrive today, largely reflecting the impact of one-off price declines during the quarter.
However, the RBA is expecting such an outcome, meaning it will have to be an unusually weak result in order to see the bank change its view that the next move in official interest rates is likely to be higher.
And if the surprise is in the other direction, it could see expectations for an earlier-than-expected rate hike lift substantially, particularly as financial markets are only pricing in a 60% probability of a 25 basis point increase by early 2020.
Here’s the state of play.
- The CPI report is based off price movements in a set basket of goods and services commonly purchased by metropolitan households.
- Individual items fall into 11 broader categories, and are weighted based on estimated expenditure by households.
- The RBA’s year-ended medium-term inflation target is 2 to 3%.
- In the June quarter, headline CPI — including all price movements in the basket — rose by 0.4%, leaving the increase on a year earlier at 2.1%.
- The quarterly rate was the seventh consecutive report that CPI undershot economist expectations.
- Tradable prices — accounting for less than 40% of the CPI basket — grew by 0.5% over the quarter, faster than a 0.3% increase in non-tradable items.
- Over the year, non-tradable inflation rose by 3%, ten times faster than non-tradable prices which increased by just 0.3%.
- Indicating that inflationary pressures were largely driven by prices 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.
- Underlying CPI — of more importance to official interest rate settings from the RBA — rose by 0.5% for the quarter, seeing the year-on-year increase fall back to 1.89% from an upwardly-revised 2.1% increase in the year to March.
- The underlying inflation measure is the average of the trimmed mean and weighted median indexes published by the ABS. These remove unusual movements in prices during the quarter and are seasonally adjusted, unlike the headline CPI figure.
- Today, economists expect both headline and underlying inflation to undershoot the RBA 2-3% medium-term target once again.
- For headline CPI, the median forecast looks for a quarterly increase of 0.5%, leaving the change on a year earlier at 1.9%.
- Underlying inflation is expected to lift by a smaller 0.4% over the quarter, seeing the year-on-year rate hold steady at 1.9%.
- Westpac Bank expects underlying inflation to lift by just 0.3% for the quarter, and by 1.8% over the year. It has a better track record than most when it comes to predicting inflation movements.
- In forecasts offered in August, the RBA saw year-ended growth in underlying inflation sitting at 1.75% by the end of this year. So it’s anticipating a weak result.
The inflation report will arrive at 11.30am AEDT.
Business Insider will attempt to dissect it all as soon at it hits the screens.
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