Australian inflationary pressures remained subdued in the final three months of 2016 with both headline and core consumer price inflation (CPI) undershooting market expectations.
According to the ABS, headline CPI rose by 0.5% during the quarter, below the 0.7% increase expected. It previously grew by 0.7% in the September quarter.
The most significant price increases during the quarter were for tobacco (+7.4%), automotive fuel (+6.7%), domestic holiday travel and accommodation (+5.5%) and new dwelling purchases by owner-occupiers (+0.5%). They were partially offset by price falls for international holiday travel and accommodation (-2.6%), accessories (-5.1%) and waters, soft drinks and juices (-3.2%).
The ABS also paid special attention to movements in vegetable prices, noting they increased by 2.5% over the quarter, taking the gain over the past 12 months to 12.5%.
“Adverse weather conditions in major growing areas over previous periods continue to impact supply for particular vegetables,” the ABS said.
This table from the ABS shows the movement in individual category across Australia’s capital cities, looking at both the quarterly and annual change.
Despite the weaker-than-expected quarterly figure, the year-on-year rate ticked up to 1.5% from 1.3% in Q3, although it too was below the 1.6% increase expected.
The ABS said that from a year earlier, tradables prices — largely influenced by global forces — rose by 0.1%, well below the 2.1% increase recorded in non-tradables prices — those influenced by domestic factors — over the same period.
Like the headline inflation figure, core inflation also undershot market expectations, rising 0.4% for the quarter against forecasts for an increase of 0.5%
Despite the softer-than-expected quarterly outcome, upward revisions to prior data saw year-on-year rate print at 1.55%, marginally ahead of the 1.5% increase expected.
The core inflation figure is of more importance to financial markets given its relationship to movements in Australian interest rates.
While very soft — yet again below the RBA’s 2-3% medium-term core inflation target — it was in line with the most recent forecasts offered by the RBA in its November statement on monetary policy.
This suggests that despite the weak quarterly core result, there’s little chance of the RBA cutting interest rates anytime soon.
However, the view that rate hike could arrive by the end of this year — something that markets had begun to price in prior to today’s report being relased — now appears a long-shot.
With inflation now running in line with the RBA’s forecasts, upcoming labour market data — particularly relating to underemployment and wage growth — along with movements in housing prices, will be highly influential on the outlook for monetary policy in the short-to-medium term.
In response to the report, showing near-term momentum in both core and headline inflationary pressures remain incredibly subdued, the Australian dollar has fallen by around 0.5% while Australian government bond yields have strengthened, reflecting the view that interest rates are unlikely to shift in either direction in the months ahead.