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Inflation bounce-back after historic decline
Consumer price index

Inflation: The Consumer Price Index (CPI) – the main measure of inflation in Australia – rose by 1.6 per cent in the September quarter (consensus: +1.4 per cent). The result follows the 1.9 per cent decline in the CPI in the June quarter – the biggest quarterly decline in 89 years. The June quarter result had been affected by the Federal Government decision to provide free child care and a 19.3 per cent fall in the cost of petrol. The temporary child care benefit has since ended while petrol prices rebounded over the September quarter.

Annual rate of inflation: In the year to September, the CPI rose by 0.7 per cent after falling 0.3 per cent in the year to June (consensus: +0.6 per cent).

Main changes: The most significant price rises in the September quarter were: were child care; automotive fuel (+9.4 per cent); preschool and primary education (+11.1 per cent); furniture (+6.4 per cent); major appliances (+5.3 per cent); and small appliances (+5.8 per cent). Notable price falls in the September quarter were: water & sewerage (down 2.7 per cent); other non-durable household products (down 4.1 per cent); personal care products (down 3.0 per cent); telco equipment (down 0.8 per cent); urban transport fares (down 3.5 per cent); pharmaceutical products (down 2.1 per cent); ‘other food products (down 3.5 per cent); cakes and biscuits (down 1.4 per cent); takeaway and fast foods (down 0.7 per cent); and ‘other’ cereal products (down 4.3 per cent).

Underlying measures: The Reserve Bank monitors three measures to derive the underlying inflation rate. The trimmed mean rose 0.4 per cent in the September quarter (1.2 per cent annual); the weighted median rose by 0.3 per cent (1.3 per cent annual) and the CPI less volatile items rose by 1.3 per cent (0.9 per cent annual). Overall, underlying inflation was 0.4 per cent in the quarter and rose by around 1.25 per cent over the year. Market goods and services less volatile items rose by 0.5 per cent in the quarter to be up 1.7 per cent on the year.

What does it all mean?

• The June quarter CPI figures were historic. The last time consumer prices fell by 1.9 per cent over a quarter – that is, over a three month period – was in 1931. The September quarter CPI marks a partial return to ‘normality’. However we will only get a true sense of inflation and where prices are headed in 2021.

• Prices rebounded in the September quarter for a number of reasons – the end of subsidised child care and the rebound in petrol prices. But the best guide to underlying prices is the ‘trimmed mean’. This measure shows prices up 0.4 per cent in the quarter to be up 1.2 per cent over the year. So low annual inflation rules, not deflation.

• Inflation is likely to remain below the Reserve Bank’s 2-3 per cent target band for a few years. As a result the Reserve Bank commits to not increasing the cash rate for three years. In fact today’s inflation result doesn’t stand in the way of a further easing of monetary policy. On Melbourne Cup day the Reserve Bank is likely to cut the target rates for cash and 3-year bond yields from 25 basis points (quarter of a per cent) to 10 basis points. The RBA is also likely to commit to purchases of 5-10 year bond yields with the intention of driving longer-term yields lower.

• The economic recovery is underway. But with unemployment rate likely to hold near 6-7 per cent, wage growth should remain modest, as should inflation. The RBA would be hoping that further monetary policy easing – combined with fiscal stimulus – being applied in a recovering economy would have added stimulatory effect.

Published by Craig James, Chief Economist, CommSec