Weak inflation means the RBA looks a long way from joining the global rate hike club

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Australia’s September quarter consumer price inflation (CPI) report has come in well below expectations, scuppering any talk of a near-term interest rate increase from the Reserve Bank of Australia (RBA).

According to the Australian Bureau of Statistics (ABS), headline CPI rose by 0.6% over the September quarter, leaving the change on a year earlier at 1.8%

Economists were looking for an increase of 0.8%, seeing the year-on-year rate tick up from 1.9% to 2%.

The quarterly increase was driven by higher utility, tobacco, and travel prices, offsetting weakness in vegetable, fuel and telecommunication costs.

“Utilities prices rose strongly in the September quarter 2017,” said Bruce Hockman, Chief Economist for the ABS.

“The most significant rises relate to electricity and gas prices, with increases in wholesale prices being passed on to consumers.

“Increases in wholesale prices have been observed across the National Electricity Market (NEM), with the most significant rises this quarter in electricity being observed in Adelaide, Sydney, Canberra and Perth.”

Electricity prices jumped by 8.9%, outpacing increases of 4.1% apiece for tobacco and international holiday travel and accommodation costs.

Vegetable, fuel and telecommunication costs fell by 10.9%, 2.3% and 1.5%.

This table from the ABS shows price movements by broader category, looking at the change over both the quarter and year.

Source: ABS

Explaining the weaker-than-expected headline increase, the ABS said that tradable prices — those influenced by global factors — fell by 0.3% over the quarter, leaving the decline over the year at 0.9%.

“The most significant negative contributors are vegetables and automotive fuel,” the ABS said. “The most significant positive contributor is international holiday travel and accommodation.

In contrast to tradable inflation, non-tradable prices — or those largely determined by domestic factors — increased by 1% over the quarter, leaving the annual increase at 3.2%.

Electricity and tobacco prices added the most to non-tradable pressures.

Underling inflation — the average of the ABS’ trimmed mean and weighted median inflation measures and of more importance in terms of the outlook for interest rates — rose by smaller 0.35%, leaving the annual rate at 1.88%.

Markets were looking for an quarterly increase of 0.5%, leaving the year-on-year rate at 2%.

The annual rate was unchanged from the previous quarter, and still below the RBA’s 2-3% inflation target. It has now been below the RBA’s target in each of the past eight quarters.

The RBA is currently forecasting that underlying inflation will sit between 1.5% to 2.5% by the end of this year, leaving the midpoint at 2%.

The loss of momentum in the underlying inflation measures during the September quarter must create some doubt as to whether that midpoint will be reached by the time Australia’s December quarter CPI report is released in early 2018.

With both headline and underlying inflation undershooting by some margin, the Australian dollar has fallen heavily and government bonds have rallied, a reaction that suggests markets now see a lesser chance that the RBA will lift interest rates for the first time since late 2010 next year.

A rate hike — something that will act to slow demand and create downside pressure on tradable prices due to the likelihood of a stronger Australia dollar — will do little to help build inflationary pressures.

Quite the contrary, in fact.

However, unlike last year when a weak inflation report prompted the RBA to cut rates in May and August, this report, in isolation, does not make the case to respond in a similar manner.

With labour market conditions and the business sector both strong, the RBA would need to see a reversal in these trends before considering the need for even easier monetary policy.

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