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Inflation rate creeps towards RBA target zone
Consumer price index

Inflation: The Consumer Price Index – the main measure of inflation in Australia – rose by 0.5 per cent in the September quarter, in line with expectations. In seasonally adjusted terms the CPI rose by 0.3 per cent. The annual rate of headline inflation lifted from 1.6 per cent to 1.7 per cent. The Aussie dollar was unchanged 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 September quarter (1.6 per cent annual); the weighted median rose by 0.3 per cent (1.2 per cent annual) and the CPI less volatile items rose by 0.8 per cent (1.9 per cent annual). Overall, underlying inflation rose by around 0.5 per cent in the quarter and by around 1.5 per cent over the year. Market goods and services less volatile items rose by 0.8 per cent in the quarter (biggest rise in almost 4 years) to be up 1.8 per cent on the year.

Main changes: International holiday travel (+6.1 per cent), tobacco (+3.4 per cent), property rates & charges (+2.5 per cent) and child care (+2.5 per cent) recorded the most significant price gains. The most significant offsetting price falls this quarter are automotive fuel (-2.0 per cent), fruit (-3.1 per cent), and vegetables (-2.5 per cent).

Notable lows: Audio-visual equipment (39-year lows). Games, toys and hobby prices (record 21-year lows). Deposit and loan facilities (record 8-year lows). Record (20-year) annual fall in cost of new dwelling purchase (-0.1 per cent) with rents up just 0.4 per cent. Electricity prices fell 2.1 per cent on the year (biggest fall in 3½ years).

Notable price increases: Bread and cereal prices (+3.6 per cent) are growing at the fastest annual rate in a decade with cereal prices up 6.4 per cent. Drought effects are also apparent in beef & veal (+7.1 per cent), chicken (+5.2 per cent), lamb (+14.3 per cent). Milk prices are up 6.7 per cent over the year, the fastest rate in 11 years.

What does it all mean?

• Inflation remains contained. The headline annual inflation rate has bottomed, but it is creeping, rather than leaping, towards the Reserve Bank’s 2-3 per cent target band. That is more than we can say about ‘underlying inflation’ which solidly remains near 1.5 per cent.

• Headline inflation may be boosted by the drought effects on food prices in coming quarters. Higher home prices may serve to lift some price measures in the ‘Housing’ grouping. Wage growth may remain low but it is still outpacing prices. And with productivity growth near zero, the positive real wage growth may be applying some upward pressure on prices – especially in the services sector.

• The Reserve Bank has indicated that rate cuts are still possible. But the language from the policymakers suggest that they are very reluctant rate cutters from here. Rates are low enough and the rate cuts have actually been having the opposite to the desired affect – spooking Aussie consumers. And there is evidence to support the ‘gentle turning point’ view of the Reserve Bank. Unemployment fell last month and home prices are again barrelling higher in Sydney and Melbourne.

• The Reserve Bank is expected to wait until at least February 2020 to decide if more interest rate stimulus is required.

What do the figures show?

• The Consumer Price Index – the main measure of inflation in Australia – rose by 0.5 per cent in the September quarter, in line with expectations. In seasonally adjusted terms the CPI rose by 0.3 per cent. The annual rate of headline inflation lifted from 1.6 per cent to 1.7 per cent.

• The Reserve Bank monitors three measures to derive the underlying inflation rate. The trimmed mean rose by 0.4 per cent in the September quarter (1.6 per cent annual); the weighted median rose by 0.3 per cent (1.2 per cent annual) and the CPI less volatile items rose by 0.8 per cent (1.9 per cent annual). Overall, underlying inflation rose by around 0.5 per cent in the quarter and by around 1.5 per cent over the year. Market goods and services less volatile items rose by 0.8 per cent in the quarter (biggest rise in almost 4 years) to be up 1.8 per cent on the year.

• Capital cities: Sydney +0.5 per cent in the quarter (annual +1.6 per cent); Melbourne +0.5 per cent (+1.7 per cent); Brisbane +0.6 per cent (+1.9 per cent); Adelaide +0.7 per cent (+1.9 per cent); Perth +0.5 per cent (+1.6 per cent); Hobart +0.5 per cent (+2.2 per cent); Darwin +0.3 per cent (+0.5 per cent); Canberra +0.7 per cent (+1.8 per cent).

• Main Positive Contributors:

Recreation and culture (+1.5 per cent) due to the peak tourist season in Europe and America which drove international holiday, travel and accommodation (+6.1 per cent).

Alcohol and tobacco (+2.0 per cent) driven by tobacco (+3.4 per cent) due to the annual increase in the tobacco excise (12.5 per cent, applied on 1 September.). Wine rose 2.6 per cent in Sydney and 3.5 per cent in Adelaide.

Domestic holiday, travel and accommodation rose 3.2 per cent in Canberra and rose 4.4 per cent in Darwin

In Brisbane electricity rose 2.6 per cent, driven by the $50 asset ownership dividend that was applied to consumers’ electricity bills last quarter.

• Main Negative Contributors:

Communication (-1.1 per cent) driven by telecommunication equipment and services (-1.1 per cent) due to increased use of mobile services.

Transport (-0.3 per cent) due to a fall in automotive fuel (-2.0 per cent) as recent falls in world oil prices flow through to consumers.

In NSW: Sports participation (-3.5 per cent) due to the introduction of a second $100 Active Kids sports voucher for school aged children in New South Wales.

In Melbourne: Electricity (-4.1 per cent) due to the introduction of the Victorian Default Offer from 1 July 2019.

In Adelaide: Insurance (-3.5 per cent) due to the Compulsory Third Party insurance market being opened to competition on 1 July.

• Prices of tradables: The tradables component of the All groups CPI rose by 0.9 per cent in the September quarter to be up 1.2 per cent over the year. Tradable goods component rose 0.3 per cent due to wine (+1.8 per cent), gas and other household fuels (+3.0 per cent), furniture (+2.4 per cent) and garments for women (+1.4 per cent). Tradable services component rose 5.8 per cent due to international holiday, travel and accommodation (+6.1 per cent).

• Prices of non-tradables: The non-tradables component of the All groups CPI rose 0.4 per cent in the September quarter to be up 1.9 per cent over the year. Non-tradable goods component rose 0.6 per cent due to tobacco (+3.4 per cent). Non-tradable services component rose 0.3 per cent due to property rates and charges (+2.5 per cent).

• In seasonally adjusted terms, the tradables component of the All groups CPI rose 0.3 per cent and the non-tradables component rose 0.5 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.

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?

• There were no real surprises in the latest inflation data. Headline inflation remains stubbornly below the 2-3 per cent target band.

• The east coast drought is driving food prices higher, especially cereals and meat. But tech goods continue to get cheaper including games, toys and hobbies. Housing costs remain low as do financial services. The cost of pets continues to lift – up 6.9 per cent over the year, the fastest growth in eight years. The low Aussie dollar has driven up international travel by 5.8 per cent on the year – fastest gain in five years. Petrol is 3.9 per cent cheaper than a year ago. Even electricity prices are falling.

• The Reserve Bank Board meets on Tuesday and is expected to leave rates unchanged. The quarterly Statement on Monetary Policy is released on November 8.

Published by Craig James, Chief Economist, CommSec