Move on, nothing to see: Inflation remains low
Consumer price index
Inflation: The Consumer Price Index (CPI) – the main measure of inflation in Australia – rose by 0.9 per cent in the December quarter (consensus: +0.7 per cent).
Annual rate of inflation: In the year to December, the CPI also rose by 0.9 per cent after rising by 0.7 per cent in the year to September (consensus: +0.7 per cent).
Main changes: The Australian Bureau of Statistics said the most significant CPI rises in the December quarter were tobacco (+10.9 per cent), following the 12.5 per cent increase in the tobacco excise tax, and child care (+37.7 per cent), after the unwinding of free child care).
Underlying measures: The Reserve Bank focuses on the trimmed mean as the key underlying price measure. The trimmed mean rose 0.4 per cent as expected in the quarter to be up 1.2 per cent on the year (survey: +1.1 per cent).
What does it all mean?
• A number of the components of the CPI remain volatile. So to work out where inflation is and where it is going it is best to focus on underlying measures like the trimmed mean that strip out some of the more volatile items. And it is clear that modest price price inflation is occurring. While not truly a goldilocks situation (not too hot or too cold), there are no concerns about falling prices or deflation, and no concerns about rapidly rising prices.
• Inflation is likely to remain below, or near the bottom, of the Reserve Bank’s 2-3 per cent target band for most of 2021. As a result the Reserve Bank has committed to not increasing the cash rate for three years.
• The economic recovery is underway. But with unemployment rate likely to hold near 5.75-7.00 per cent over 2021, wage growth should remain modest, as should inflation.
• But given that economic recovery is underway, we can’t be totally complacent. Purchasing manager surveys are already starting to note price pressures at a business level in manufacturing and services sectors. The question is how much, and how quickly, the higher costs are passed-through into consumer prices.
The information presented in this email is an extract of a CommSec Economic Insights report. The full report is published on the CommSec website (under Market News > The Markets). The extract and report are approved for distribution in Australia only and must not be directed or distributed to any person or entity outside Australia, except with the prior approval of your Business Unit Compliance team.
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Published by Craig James, Chief Economist, CommSec