While above expectations, Australian core inflation remains soft

Australian consumer price index data is out and while the headline data is softer than expected, core inflation — which is central to the interest rate outlook — has come in slightly above expectations.

Headline inflation was 0.7% for Q2 and 1.5% for the year to June.

Markets were looking for an increase in headline inflation of 0.8%, leaving the annual rate of change at 1.7%.

Core inflation was 0.55% for the quarter and 2.3% for the year, down from an upwardly revised 2.4% in Q1.

Here’s the chart tracking Australian core inflation with the latest data:

In terms of the main contributors to movements in the headline CPI index, the ABS notes the most significant price rises this quarter were for automotive fuel (+12.2%), medical and hospital services (+4.5%) and new dwelling purchase by owner-occupiers (+1.5%). Offsetting those increases, domestic holiday travel and accommodation fell by 5.4% while prices for pharmaceutical products slipped 1.8%.

The respective movements for each category can be found in the table below. Those highlighted are the movements recorded between April and June.

In a stark turnaround from the trend in recent years, domestic-orientated prices pressures, known as non-tradable inflation, were outpaced by inflation pressures stemming from overseas influences, or tradable inflation.

Non-tradable inflation, accounting for 60% of the ABS’ CPI basket, rose by just 0.6% during the quarter in seasonally adjusted terms. Had it not been for higher prices for owner-occupier property purchases, the growth figure would have been considerably less.

Tradable inflation, making up the remaining 40% of the CPI basket, rose by 1.1% on the back of higher petrol prices.

Over the past year non-tradable inflation increased by 2.6%, offsetting a 0.3% decline in tradable inflation.

While on a national level headline inflation rose by 0.7%, there were vast disparities seen between the various states and territories.

Reflective of overall economic conditions, along with recent movements in residential property prices, inflation in Sydney increased by 0.9% during the quarter leaving the annual rate at 2.2%. At the other end of the spectrum prices in Darwin were unchanged leaving the annual rate at just 0.2%.

The table below shows movements in prices across the various states and territories.

While the core inflation figure, at 2.3% year-on-year, was slightly above the 2.2% median economist forecast, the market reaction suggests the report has done little to sway expectations for future interest rate movements. The Australian dollar, having rallied as high as .7438 following the CPI release, has fallen to .7395 while November cash rate futures have firmed a tick to 97.9 (1.90%). The ASX 200, having been down one percent before the release, has cut its losses to 0.85%.

The lack of market reaction is reflective of the view of ANZ chief economist Warren Hogan who tweeted this shortly after the CPI report was released.

With the CPI release offering no real clues as to whether or not the RBA will decrease interest rates further, all attention will now turn to Governor Glenn Stevens who is scheduled to speak at 1.05pm AEST this afternoon.

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