- Australia’s June quarter consumer price inflation (CPI) report came in slightly weaker-than-expected.
- Financial market movements indicate there’s now less chance of a RBA rate hike arriving in the foreseeable future.
- Economists have expressed a similar view, although they don’t believe it has any near-term implications for monetary policy settings.
For what seems to the be the umpteenth time in a row, Australia’s latest consumer price inflation (CPI) has come in weak.
Inclusive of all price movements in the CPI basket during the quarter, prices rose by just 0.4%, falling short of expectations for a larger increase of 0.5%.
Despite accelerating over the year, the annual increase, at 2.1%, was also below market expectations.
Of what price pressures there were, most came from non-discretionary areas, indicative of the squeeze being felt by Australian households from years of underwhelming wage growth.
Indeed, when Australia’s latest wage price index is released next month, it’s likely to reveal that private-sector hourly pay rates went backwards in real terms over the year.
Adding to the soft undercurrents in the inflation report, underlying CPI — more relevant to official interest rate settings from the RBA — only grew by 1.9% over year, down from 2.1% in the year to March.
The result was below the bottom of the RBA’s 2-3% inflation target, and fell short of 2% level it expected three months ago.
It was a weak report, make no mistake, scuppering yet again any near-term chance of a lift in official interest rates. Given the annual increase in underlying inflation decelerated away from the RBA’s target, it will also do little to dull chatter that the next move in official rates may not be higher but lower.
However, based on recent remarks offered by the RBA, it still believes the next move is still likely to be higher, confident that improving economic growth and lower unemployment will eventually be enough to boost wage and inflationary pressures.
Right now, and even with some positive signals on that front, it’s clearly not helping to lift inflationary pressures by any meaningful amount.
Financial markets certainly don’t think the RBA will be moving interest rates for the foreseeable future, selling down the Aussie dollar, and buying government bond future, reflective of the soft inflation result.
Now that they’ve had a chance to peruse the details, here’s a selection of economist notes we’ve received detailing their view on the report.
Joanne Masters, ANZ
Q2 inflation data confirmed that inflationary pressures are building only very gradually. Core inflation was in line with market expectations with some upward revisions, but the detail was relatively weak with core momentum easing.
Disappointingly, domestic market services inflation decelerated despite signs that wage growth is picking up. In the face of ongoing retail competition and the weakness in the rental market, an acceleration in this component is critical to lifting overall inflation. On the positive side, the diffusion index rose.
From a policy perspective, the Q2 data supports the case that the RBA is a long way from tightening. In our view, inflation will rise only very gradually, with sufficient progress toward the mid-point of the policy target band unlikely to emerge until the second half of 2019. Higher inflation will require a lift in wage growth feeding through to domestic services prices. Focus will now turn to the Q2 Wage price Index on 15 August.
Shane Oliver, AMP Capital
The June quarter inflation data confirms yet again that, while we may have seen the bottom in inflation for this cycle in 2016, price growth is only running around the bottom end of the RBA’s 2-3% target band and there are no signs of any near-term significant price pressures in Australia, particularly with subdued wages growth and competition and technological innovation remaining intense.
We remain of the view that the RBA won’t raise interest rates until 2020 at the earliest and, given the weakness in inflation, wages and the Sydney and Melbourne housing markets, along with the uncertain outlook for consumer spending, the next move being a rate cut cannot be ruled out.
Michael Blythe, Commonwealth Bank
The RBA has recently taken to emphasising the midpoint of the target in its discussion of the inflation outlook rather than the 2-3% target band itself. So a CPI print at the low end of the band is not a particularly significant event.
Nevertheless, the policy debate will focus on the underlying inflation measures that are tracking at or just below the target band. The outcome was in line with expectations. But the RBA will note the smallish upward revision to Q1 readings. And the step up in H1 2018.
On a six-month-ended basis that smooths out some of the quarterly “noise”, underlying inflation was running at an annualised pace of 2.0%, up from 1.7% at the end of 2017.
From that perspective, we believe that the RBA will continue with the methodology that the next move in the cash rate is more likely to be up than down. But there is no case for any near term adjustment. The RBA is unlikely to deliver on its conditional tightening bias before Q1 2019 at the earliest.
As has been the case for some time now, the direction of wages is the key. RBA Governor Lowe has identified weak wages growth as not only a significant economic risk but also a potential threat to social cohesion via a diminished sense of shared prosperity. So the Q2 wages data is arguably the more important input into the policy equation than today’s CPI print.
Ben Jarman, JP Morgan
We expect core inflation to stay around 2%, as the economy is running a negative output gap, with soft per-capita income growth and significant pressure toward narrowing of domestic profit margins. Unit labor costs had perked up a bit after last year’s employment boom, but wage inflation is the more durable driver of unit costs, meaning the latter are now decelerating alongside employment growth. At the group level too, downside risks still loom to the bellwether housing group.
If the RBA were operating under its historical reaction function, data of this sort would draw easier policy. But inflation has been tracking this trajectory for the past 18 months without bringing forth further easing. For a central bank that is deeply averse to further rate cuts, today’s numbers are no greater challenge to the inflation target than has been accumulating since late 2016. These data will, at least, reconfirm to the RBA that it has the flexibility on the inflation front to stay on hold for a long time and promote gradual improvement in growth.
Callam Pickering, Indeed
Inflation remains relatively low for two main reasons. First, wage growth remains subdued and has shown little sign of improvement. With slack in the labour market still high we might be years away from seeing a break-out in wages. Second, Australia continues to import low inflation from abroad. Inflation on tradable goods is barely changed over the past year, which has helped to offset a 3% rise in consumer prices on non-tradable goods.
Fixing wage growth is obviously difficult, as our policy-makers have found out, and we have little control over prices of imported products. A lower Australian dollar would obviously help but it has shown little sign of breaking from its trading range over the past couple of years. However, given the volatility of currency markets the Australian dollar represents a clear risk to the inflation outlook.
Given these factors, it appears unlikely this inflation report will impact RBA thinking on monetary policy. While inflation is past its trough there is still much progress to be made before it returns to the middle of the RBA’s inflation target band. Given the ongoing weakness in wage growth we don’t expect that to eventuate in the near-term, putting little pressure on the RBA to increase rates.
Paul Dales, Capital Economics
A lot of the upward influences on inflation came from areas where prices aren’t really set by economic forces [during the quarter]. The 2.8% rise in tobacco prices was bigger than the 2.5% gain usually seen at this time of the year due to the flow on effects of the increase in the Federal excise tax on 1st March. Even the 2.7% rise in medical services prices, which was due to higher health insurance premiums on 1st April, was smaller than the average 3.7% gain in the second quarter in the previous five years.
But there was lots of evidence of weaker price pressure in more discretionary areas. The stagnation in rents compared to the usual 0.6% gain at this time of year and the 0.8% rise in new dwellings purchased was smaller-than-usual. They show how the weaker housing market is restraining inflation. That may also explain the 0.3% rise in furniture/household goods, which was below the five-year average of 0.9%.
In short, if the RBA is looking for evidence that the recent strengthening in the economy is boosting underlying price pressures, then it’s not going to find it in this inflation report.
Paul Bloxham, HSBC
Today’s inflation numbers were not particularly exciting.
On the headline rate, the interesting feature was that despite a decent rise in petrol prices, CPI inflation is only just back in the target band. On the underlying measures, which are the key measures the RBA will be watching, today’s numbers confirmed, once again, that the pulse of inflation is past its trough. At the same time, however, both the measures are still quite low, running at annual rates that are a touch below the 2-3% target. And, the upward momentum in the underlying measures is weak.
Combine these numbers with labour market numbers that, as last week’s jobs report confirmed, are showing a very slow tightening, and it seems likely that the word of the moment for the RBA is going to continue to be ‘gradual’ for some time yet. This is expected to leave the RBA firmly on hold for some time.
Nonetheless, much like the RBA themselves, we do expect that the next move for the cash rate is more likely to be up than down. We see the current pick-up in growth continuing to gradually tighten the labour market, which should lift wage growth and inflation over time.
In our view, the RBA will need to see enough upward momentum in wages growth to credibly forecast that it will lift to over 3% before they will then be able to forecast that inflation will head back to the mid-point of the 2-3% target band. We think this will take a number of quarters yet. Next focus will be on the Q2 wage price index, due to be published on 15 August.
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