Inflation blip

Consumer Price Index

What happened? The main measure of inflation in Australia – the Consumer Price Index (CPI) – rose by 0.8 per cent in the June quarter (consensus: +0.7 per cent). The annual rate of growth lifted from 1.1 per cent to 3.8 per cent – the fastest pace since September quarter 2008. The ‘underlying’ CPI or trimmed mean rose by 0.5 per cent in the quarter (consensus: +0.5 per cent) with the annual growth rate lifting from a record low 1.1 per cent to 1.6 per cent, still well below the Reserve Bank’s 2-3 per cent target range.

Implications: A spike in the annual inflation rate had been expected. Today’s result has no immediate implications for monetary policy settings. It is what happens from here that’s important. And while economic activity had been solid until early June with unemployment continuing to fall, the delta virus outbreak across much of mainland Australia muddies the water for the job market, wages and prices. Rates could remain low for another two years. In the upcoming profit reporting season investors will want to see how ASX-listed companies are grappling with margin pressures from rising costs and supply chain disruptions.

The inflation data is pivotal in Reserve Bank interest rate deliberations.

What does it mean?

• In the June quarter last year the CPI contracted by 1.9 per cent with prices down 0.3 per cent over the year. The drop in prices was largely the result of free child care, free pre-school in some states and a slump in petrol prices. That context is super-important for today’s lift in the inflation rate. Economists often refer to this as ‘base effects’, where prices plunge due to an unforeseen economic event or shock with the annual rate of growth rebounding a year later off low levels.

• Deflation was never going to be the norm last year. And an inflation rate hovering near 4 per cent won’t become the norm this year. But where inflation eventually settles will be important along with wage growth and the unemployment rate.

• The Reserve Bank wants to see: annual inflation sustainably settle between 2-3 per cent; is looking for annual wage growth to lift to 3 per cent; and wants the jobless rate to fall to near 4 per cent (full employment). Essentially the troika must be achieved before the Reserve Bank Board will even start thinking about lifting interest rates.

• With the Sydney lockdown in its fifth week and unlikely to end soon, now is not the time for detailed deliberations on monetary policy settings. Clearly significant fiscal and monetary policy stimulus is required to support businesses and workers – those in lockdown and those that are just starting to emerge. The short-term aim is to quash virus outbreaks and accelerate vaccination rates so greater normalcy can return to much of the nation.

• At the Commonwealth Bank Group we have revised our short term economic forecasts. The delta variant outbreak may lead to a 2.7 per cent contraction in the economy in the current September quarter. We expect the jobless rate to lift from 4.9 per cent to 5.6 per cent before again trending lower. The trimmed mean inflation rate will edge higher only slowly to 2 per cent in a year’s time. Wage growth won’t get to 2.9 per cent until early 2023. So rate hikes won’t be considered until June quarter 2023.

• In terms of inflation, the big question is how much of the 3.8 per cent annual rate will hang around in the system. Already higher prices for petrol and a raft of goods in short supply have served to push up inflation expectations. But once global production levels lift to more normal rates, supply and demand will be better balanced and some of the ‘transitory’ boost to prices will be removed.

• Determining what is the more permanent level and growth of prices is the task for policymakers, both here and abroad. In fact, the International Monetary Fund (IMF) overnight said, “Inflation is expected to return to its pre-pandemic ranges in most countries in 2022.”

Published by Craig James, Chief Economist, CommSec