10min read
PREVIOUS ARTICLE CommSec Daily Report Wednesday NEXT ARTICLE Slowest business credit growth in 30 months. Record tourists from Indonesia.

Inflation dragon still dozing
Consumer price index

Inflation: The Consumer Price Index – the main measure of inflation in Australia – rose by 0.6 per cent in the June quarter, above expectations. In seasonally adjusted terms the CPI rose by 0.7 per cent. The annual rate of headline inflation lifted from 1.3 per cent to 1.6 per cent. The Aussie dollar rose by almost a quarter of a cent against the greenback in response.

Underlying measures: The Reserve Bank monitors three measures to derive the underlying inflation rate. The trimmed mean rose by 0.4 per cent in the June quarter (1.6 per cent annual); the weighted median rose by 0.4 per cent (1.2 per cent annual) and the CPI less volatile items rose by 0.3 per cent (1.5 per cent annual). Overall, underlying inflation rose by around 0.4 per cent in the quarter and by around 1.5 per cent over the year. Market goods and services less volatile items rose by 0.5 per cent in the quarter to be up 1.6 per cent on the year.

Main changes: Automotive fuel (+10.2 per cent), medical and hospital services (+2.6 per cent) and international holiday travel (+2.7 per cent) recorded the most significant price gains. The most significant offsetting price falls this quarter are fruit (-4.1 per cent), electricity (-1.7 per cent) and domestic travel (-1.5 per cent).

Notable lows: Audio-visual services (30-year lows); Audio-visual equipment (39-year lows). Rents are growing at the equal slowest annual pace on record (+0.4 per cent); new dwelling purchase growing at the slowest annual rate (+0.2 per cent).

Notable price increases: Bread prices (+4.8 per cent) are growing at the fastest annual rate in a decade. Drought effects are also apparent in beef & veal (+6 per cent), chicken (+4.1 per cent), lamb (+13.5 per cent). Milk prices are up 2.9 per cent over the year, the fastest rate in a decade.

 

 

 

 

 

 

 

 

 

 

What does it all mean?

• Inflation remains contained. But we can never claim that the inflation dragon is dead, rather resting or dozing. Higher fuel prices can be passed through in terms of higher taxi and public transport fares as well as freight and courier prices. Weather events like the current drought in eastern Australia can push up prices of supermarket goods as well as café, restaurant and takeaway food prices. The high activity in infrastructure building can put upward pressure on construction sector wages, in turn lifting prices of newly-built dwellings.

• Clearly fuel and food prices are volatile. Fuel lifted 10.2 per cent in the June quarter, but over the past month, petrol is down by 3 per cent.

• If we are looking where future inflation pulses can come from, fuel prices, weather events, administered prices (such as utilities and child care), the exchange rate, construction and wages are the things to watch.

• Headline inflation has averaged 1.7 per cent over the past five years and averaged 2.1 per cent over the past decade. So clearly inflation remains below ‘normal’ levels and certainly still below the Reserve Bank’s 2-3 per cent target band.

• The key underlying measures of inflation rose 0.3-0.5 per cent in the June quarter. Even if the latest results were annualised, inflation would be below the Reserve Bank’s 2-3 per cent inflation target.

• Wages are still growing at a slower pace than in the past. But wages are outpacing prices and have lifted from lows. And businesses can’t absorb higher costs forever. The next wage price index data is released on August 14.

• The Reserve Bank has cut rates in quick succession. At the same time there are indications that economic momentum has improved since the election. The US Federal Reserve is poised to cut rates. So it is opportune that the RBA stays on the interest rate sidelines for now. But with inflation below the target band and likely to remain low, the Reserve Bank can cut rates further if it believed it would be successful in generating faster economic growth, higher wages and lower unemployment.

What do the figures show?

• The Consumer Price Index – the main measure of inflation in Australia – rose by 0.6 per cent in the June quarter, above expectations. In seasonally adjusted terms the CPI rose by 0.7 per cent. The annual rate of headline inflation lifted from 1.3 per cent to 1.6 per cent. The Aussie dollar rose by almost a quarter of a cent against the greenback in response.

• The Reserve Bank monitors three measures to derive the underlying inflation rate. The trimmed mean rose by 0.4 per cent in the June quarter (1.6 per cent annual); the weighted median rose by 0.4 per cent (1.2 per cent annual) and the CPI less volatile items rose by 0.3 per cent (1.5 per cent annual). Overall, underlying inflation rose by around 0.4 per cent in the quarter and by around 1.5 per cent over the year. Market goods and services less volatile items rose by 0.5 per cent in the quarter to be up 1.6 per cent on the year.

• Capital cities: Sydney +0.7 per cent in the quarter (annual +1.7 per cent); Melbourne +0.5 per cent (+1.3 per cent); Brisbane +0.6 per cent (+1.7 per cent); Adelaide +0.5 per cent (+1.4 per cent); Perth +0.7 per cent (+1.6 per cent); Hobart +0.6 per cent (+2.3 per cent); Darwin +0.8 per cent (+0.8 per cent); Canberra +0.3 per cent (+1.7 per cent).

• Main Positive Contributors:

Transport (+3.4 per cent) driven by higher world oil prices and retail fuel margins resulting in an increase in automotive fuel (+10.2 per cent). Automotive fuel rose in all capital cities this quarter, ranging from Canberra (+1.7 per cent) to Sydney (+11.8 per cent).

Health (+1.8 per cent) due to the cyclical increase in Private Health Insurance premiums in the medical and hospital services (+2.6 per cent) from 1 April. Medical and hospital services rose in all capital cities, ranging from Canberra (+1.8 per cent) to Adelaide (+3.8 per cent).

• Main Negative Contributors:

Food and non-alcoholic beverages (-0.4 per cent) driven by an improved supply of fruit and vegetables with autumn/winter produce coming into season, and bananas returning to normal prices following adverse weather conditions in Queensland last quarter. Perth exhibited a smaller fall than the other cities due to localised drought conditions affecting fruit and vegetable supply.

Housing (-0.2 per cent) driven by utilities (-1.0 per cent), new dwelling purchase for owner-occupiers (-0.2 per cent), and continued weakness in rents (0.0 per cent). Utilities fell in all cities excluding Perth (0.0 per cent) and Darwin (+0.1 per cent), ranging from Hobart (-0.1 per cent) to Brisbane (-3.2 per cent).

• Prices of tradables: The tradables component of the All groups CPI rose by 1.2 per cent in the June quarter to be up 1.1 per cent over the year. The tradable goods component rose by 1.2 per cent due to automotive fuel (+10.2 per cent). The tradable services component rose 2.5 per cent due to international holiday travel and accommodation (+2.7 per cent).

• Prices of non-tradables: The non-tradables component of the All groups CPI rose 0.2 per cent in the June to be up 1.8 per cent over the year. The non-tradable goods component rose 0.2 per cent due to tobacco (+2.4 per cent). The non-tradable services component rose 0.3 per cent due to medical and hospital services (+2.6 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.

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?

• The low cost of housing is keeping inflation contained. Rents are growing at the equal slowest annual rate in 46 years (0.4 per cent). And the cost of new dwelling purchase is growing at the equal slowest pace in 20 years (0.2 per cent). But with interest rates low and signs of the home purchase market awakening, how long can we rely on housing to keep inflation in check?

• The Reserve Bank has cut rates in quick succession. Now is the time to take a lie of the land before deciding the next move. The Reserve Bank Board meets on Tuesday with the quarterly Statement on Monetary Policy on August 9.

Published by Craig James, Chief Economist, CommSec