Australia’s June quarter consumer price inflation (CPI) report has missed to the downside.
According to the Australian Bureau of Statistics (ABS), headline inflation rose by 0.2% over the quarter, leaving it up 1.9% from a year earlier.
It was expected to increase by 0.4%, leaving the year-on-year rate at 2.2%.
The quarterly increase was at the bottom of all individual economist forecasts, and saw the year-on-year rate fall back from 2.1%.
The ABS said that the most significant price rises for the quarter were for medical and hospital services (4.1%), new dwelling purchase by owner-occupiers (0.9%) and tobacco (1.0%), offsetting weakness in domestic holiday travel and accommodation and automotive fuel which fell by 3.2% and 2.5% respectively.
Helping to explain the weakness in the headline rate, the ABS said that tradable inflation — impacted by offshore factors — fell by 0.3% over the quarter, driven by weakness in fuel prices.
That was offset by a 0.4% increase in non-tradable items, those influenced by domestic factors.
Over the year tradable inflation grew by 0.4%, significantly outpaced by a 2.7% increase in non-tradable prices.
This table from the ABS shows the contribution to the change in the CPI basket, both over the June quarter and from a year earlier.
Bruce Hockman, chief economist at the ABS, summed up the result perfectly.
“Inflation in Australia remains low,” he said following the release of the report.
“Price falls for automotive fuel and ongoing competition in the clothing and food retail markets has contributed to this quarter’s result.”
Hockman added that the ABS continues to closely monitor the impact of Cyclone Debbie on fruit and vegetable prices.
“While strong price rises were recorded for select fruit and vegetables such as tomatoes, beans, cucumbers, melons, berries and bananas in the June quarter 2017, these rises were offset by falls in seasonally available fruits such as oranges, mandarins and apples.”
By capital city, quarterly headline inflation readings ranged from 0% in Perth, Hobart and Darwin to as much as 0.5% in Brisbane. Over the year, inflation increased by over 2% in Sydney, Melbourne, Hobart and Canberra, above the levels seen in other parts of the country.
That likely reflective of stronger economic conditions in Australia’s southeastern corner over the past year.
Core inflation — that which strips out volatile price movements during the quarter and of far more importance in terms of the outlook for monetary policy settings from the RBA — increased by 0.53% from the March quarter.
From a year earlier it grew by 1.84%, remaining below the RBA’s 2-3% inflation target. It was expected to increase by 0.5%, leaving the year-on-year rate unchanged at 1.75%.
Despite the still-weak core result, crucially, it was fractionally above the 1.75% level forecast by the RBA in its May Statement on Monetary Policy. The year-on-year rate was also the fastest since the December quarter of 2015.
This chart shows the core inflation rate slowly crawling back towards the RBA’s inflation target.
Despite the recent acceleration, Kate Hickie, Australia and New Zealand economist at Capital Economics, doesn’t expect that trend to continue.
“We doubt this will mark the beginning of a sustained pick-up in underlying inflation given that GDP growth is likely to remain below potential again this year and next,” she said following the release of the report.
“Alongside the RBA’s financial stability concerns, this explains why we doubt the RBA will begin to raise rates until 2019.”
Indeed, despite the lift in the core inflation measure, financial markets have reacted to the weakness in the headline rate, briefly driving the Australian dollar back below the 79 cent level.
Government bond futures are also a touch firmer than the levels seen before the CPI report was released.
While no doubt impacted by the headline CPI reading, something that is influential on consumer inflation expectations and, down the line, labour costs, the moves in financial markets may also reflect the fact that RBA governor Philip Lowe is about to deliver a key speech on monetary policy and the labour market in Sydney.
Like his deputy Guy Debelle last week, many see this as an opportunity for Lowe to curb growing market speculation about the potential for an earlier-than-expected rate hike from the RBA.
Lowe is scheduled to speak at 1.05pm AEST.