The Pressure's Off The RBA To Raise Rates

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The annual rate of inflation in Australia increased in the first quarter of 2014 but that doesn’t mean that rates are going to rise any time soon.

The seasonally adjusted increase of 0.6% for the quarter took the year-on-year rate up to 2.9% but well below the 3.2% level many in the market feared.

The big driver was the jump in alcohol and tobacco which leapt 2.9% higher in the quarter (tobacco on its own was up 6.7% on the back of government indexation) to a year on year rate of 6.8%.

Also sharply higher was fuel which rose 4.1% and secondary and tertiary education up 6% and 4.3% respectively.

Offsetting these rises were falls in furniture of 4.3% and maintenance and repair of motor vehicles which dropped 3.3%.

The point to keep in mind is it’s a number lower than the market expected, and a number that has been heavily influenced by either government changes to the pricing of tobacco or global market pricing of things like fuel.

Price growth for other things in the domestic economy remained relatively subdued.

Certainly the year on year headline CPI rate rose to 2.9% from 2.7% last quarter but as the RBA has said many times over the past few months and said again in the statement from the governor after the Board meeting this month, “If domestic costs remain contained, some moderation in the growth of prices for non-traded goods could be expected over time, which should keep inflation consistent with the target, even with lower levels of the exchange rate.”

Which makes the break up between tradable and non-tradables key to their outlook.

On this front the ABS said:

Over the twelve months to the March quarter 2014, the tradables component rose 2.6%, while the non-tradables component rose 3.1%. This compares to the rises of 1.0% and 3.7% respectively through the year to the December quarter 2013.

That’s the deceleration in non-tradables the RBA was looking for.

“The biggest downside surprises at first glance appear to be for retailing components such as clothing & footwear and furnishings & household equipment, reversing upside surprises in the previous quarter,” ANZ said in a note to clients. “This does not suggest an intensification in the pace of currency pass-through or a widening of retail margins in the quarter which will be of comfort to the RBA.”

It is more than likely that the RBA will maintain its sanguine outlook on price pressures at their next board meeting and the next Statement on Monetary Policy to be released on May 9.

So there is nothing in this number to suggest anything other than a continuation of the RBA’s period of stability for interest rates will continue.

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