Low inflation keeps consumers in ascendancyConsumer price index
Inflation: The Consumer Price Index – the main measure of inflation in Australia – rose by 0.4 per cent in the March quarter, below expectations for a lift of 0.5 per cent. In seasonally adjusted terms the CPI rose by 0.5 per cent. The annual rate of inflation remained at 1.9 per cent.
Underlying measures: The Reserve Bank monitors three measures to derive the underlying inflation rate. The trimmed mean rose by 0.5 per cent in the March quarter (1.9 per cent annual); the weighted median rose by 0.5 per cent (2.0 per cent annual) and the CPI less volatile items rose by 0.4 per cent (2.0 per cent annual). Overall, underlying inflation rose by 0.5 per cent in the quarter and by 2.0 per cent over the year. Market goods and services less volatile items was flat in the quarter to be up 1.1 per cent on the year.
Main changes: Secondary education fees rose by 3.3 per cent in the March quarter with gas & household fuels up 6.0 per cent, pharmaceutical products up 5.6 per cent, vegetables up 3.7 per cent and hospital andmedical services up 1.5 per cent. International holiday travel & accommodation fell 2.4 per cent with audio visual, and computing media and services down 6.1 per cent and furniture down by 2.8 per cent.
Prices of a raft of items are at the lowest levels for around 30 years: Women’s clothing is the cheapest in 29 years; women’s shoe prices are the cheapest in 31 years; audio, visual & computing equipment is the cheapest on record (37 years). Small and major household appliances are the cheapest in around 30 years. Education fees recorded the smallest annual rise in 35 years.
What does it all mean?
Move on, move on, nothing to see here. Economists expected inflation to rise by around 0.5 per cent in the quarter and by 2 per cent over the year. Headline inflation was a touch lower than this but underlying inflation was almost spot on. The Reserve Bank Governor has warned that inflation is only likely to rise gradually over time and that interest rates would remain stable for some time. So, for the Reserve Bank, there are no surprises.
Consumers remain in the ascendancy over retailers in the low inflation environment. Not that businesses are  complaining – the latest surveys indicate that business conditions are near the best levels recorded. And that’s because Corporate Australia has adjusted to the times by trimming costs and keeping prices low and thus generating higher sales and record profits.
The Reserve Bank won’t be touching interest rates any time soon. Inflation remains low and it is still struggling to get into the 2-3 per cent target band. The Reserve Bank Governor says he would like to see inflation at a 2.5 per cent annual rate with wage growth at 3.5 per cent, but we are still some way off these growth rates.
Where will the higher rate of inflation come from? The rising price of oil is something to watch. The other ‘hot button’ area is construction where there are more anecdotes of skill shortages, putting upward pressure on wages.
CommSec expects the Reserve Bank to stay on the interest rate sidelines for some time. It must be remembered that the cash rate still remains at effectively “emergency” levels – a record low of 1.5 per cent. There is no value in cutting interest rates – home prices are only now tracking at more sustainable growth rates. But with no inflation to speak of, interest rates aren’t going higher.
It’s worth noting that the Reserve Bank expects underlying inflation to hold near 1.75 per cent over 2018. The Bank will revisit these forecasts in the next quarterly Statement on Monetary Policy on Friday week. If there is a risk, the RBA may tweak the forecast for underlying inflation a tad higher to 2 per cent.
What do the figures show?
The Consumer Price Index – the main measure of inflation in Australia – rose by 0.4 per cent in the March quarter, below expectations for a lift of 0.5 per cent. In seasonally adjusted terms the CPI rose by 0.5 per cent. The annual rate of inflation was steady at 1.9 per cent.
The Reserve Bank monitors three measures to derive the underlying inflation rate. The trimmed mean rose by 0.5 per cent in the March quarter (1.9 per cent annual); the weighted median rose by 0.5 per cent (2.0 per cent annual) and the CPI less volatile items rose by 0.4 per cent (2.0 per cent annual). Overall, underlying inflation rose by 0.5 per cent in the quarter and by 2.0 per cent over the year. Market goods and services less volatile items was flat in the quarter to be up 1.1 per cent on the year.
Most notable price rises: Secondary education fees rose by 3.3 per cent in the March quarter (seasonal) with gas & household fuels up 6.0 per cent (largely Melbourne), pharmaceutical products up 5.6 per cent (seasonal), vegetables up 3.7 per cent and hospital and medical services up 1.5 per cent.
Most notable price declines: International holiday travel & accommodation fell 2.4 per cent (seasonal) with audio visual, and computing media and services down 6.1 per cent and furniture down by 2.8 per cent.
Prices of tradables fell by 0.4 per cent in the March quarter. According to the Bureau of Statistics: “The tradable goods component fell 0.2 per cent mainly due to audio, visual and computing media and services (-6.1 per cent), furniture (-2.8 per cent) and audio, visual and computing equipment (-2.9 per cent). The tradable services component fell 2.2 per cent due to international holiday travel and accommodation (-2.4 per cent).”
Prices of non-tradables rose by 0.8 per cent in the March quarter. According to the Bureau of Statistics: “The non-tradable goods component rose 0.9 per cent, mainly due to pharmaceutical products (+5.6 per cent), beer (+2.0 per cent) and electricity (+1.8 per cent). The non-tradable services component rose 0.9 per cent, mainly due to secondary education (+3.3 per cent) and medical and hospital services (+1.5 per cent).”
Tradable goods are those items whose prices are largely determined on the world market. Non-tradable prices are more affected by domestic economic conditions.
Over the last twelve months, the tradables component fell by 0.5 per cent, while the non tradables component rose by 3.1 per cent. 
Capital cities: Sydney +0.3 per cent in the quarter (annual +2.1 per cent); Melbourne +0.9 per cent (+2.2 per cent); Brisbane +0.1 per cent (+1.7 per cent); Adelaide +0.4 per cent (+2.3 per cent); Perth +0.1 per cent (+0.9 per cent); Hobart +0.7 per cent (+2.0 per cent); Darwin +0.0 per cent (+1.1 per cent); Canberra +0.8 per cent (+2.4 per cent).
Across the capital cities the largest contributors to price gains over the March quarter:
* Sydney – new dwelling purchase by owner-occupiers (+1.4 per cent);* Melbourne – electricity (+13.1 per cent);* Brisbane – maintenance and repair of motor vehicles (+3.8 per cent);* Adelaide – new dwelling purchase by owner-occupiers (+1.7 per cent);* Perth – petrol (+2.7 per cent);* Hobart – domestic holiday travel & accommodation (+4.3 per cent);* Darwin – petrol (+6.2 per cent);* Canberra – petrol (+6.1 per cent).
Why is the data important?
The Consumer Price Index (CPI) is regarded as Australia’s premier measure of inflation. The CPI is published quarterly and measures price changes for a ‘basket’ of goods and services that dominate expenditure of metropolitan households. The “All Groups” index is the main focus, but other inflation measures are also published such as so-called ‘underlying’ measures. These include measures that abstract from price changes in volatile price items such as fresh food and petrol.
The Reserve Bank aims to keep the headline inflation rate between 2-3 per cent over an economic cycle. If inflation is high and expected to rise, the Reserve Bank may elect to raise interest rates in order to constrain price pressures. Conversely, if inflation is low and expected to remain low, the Reserve Bank may elect to cut interest rates if it believes the growth pace of the economy is in need of strengthening.
What are the implications?
Inflation remains contained but there is no room for complacency. Prices are still more likely to rise over the coming year, not fall. And a weaker Aussie dollar could be one of the factors adding some upside pressure to traded good prices.
The other factor is petrol. Interestingly petrol was the biggest driver of inflation in three of the smaller capital cities but didn’t feature as a key driver in the big capital cities. World crude oil prices are more likely to rise. And that doesn’t affect just motorists but feeds into the items with a high transport component like fresh food.
But while petrol prices have scope to lift, the cost of new homes – a key inflation driver in three capital cities in the quarter – may not provide the same inflationary boost ahead.
CommSec expects the cash rate to remain low for some time.
Published by Craig James, Chief Economist, CommSec