Originally published by AMP Capital
- The Australian September quarter Consumer Price Index showed headline inflation of 0.4% quarter on quarter or 1.9% year on year. This was slightly less than market expectations for a 0.5% quarter on quarter rise and the annual rate is down from 2.1% in the June quarter.
- Underlying inflation, as measured by the trimmed mean and weighted median, averaged 0.3% over the quarter and 1.7% over the year which was a little below expectations and down from 1.8% over the year to the June quarter. Underlying inflation is focussed on by the RBA because it gives a better guide to fundamental price trends in the economy by excluding volatile price changes.
Prices for holiday travel, tobacco, petrol, utilities and urban transport fares saw solid increases but at a headline level this was offset by a sharp 11.8% fall in child care costs due to an expanded subsidy and a seasonal fall in health costs. But at an underlying level ongoing price weakness was evident in a whole range of areas including in some food products, most clothing items, rents (which are up just 0.6%yoy) food, household products and services, motor vehicles where prices are down 1.8%yoy, communications and electronic goods. While the Australian dollar has fallen, tradeable inflation is running at just 1.4%yoy.
The September quarter inflation data confirms that underlying pricing pressures in the Australian economy are still weak as spare capacity remains high, wages growth remains weak and competition and technological innovation in numerous industries (retail, communications and services) remains intense.
While the mean and median underlying inflation measures fell from 1.8%yoy to 1.7%yoy, other measures of underlying inflation are even weaker. Inflation in the private sector part of the economy excluding volatile items is running at just 1.1% year as year (as measured by the “market goods and services ex volatile items” index). This is in contrast to inflation in the government influenced parts of the economy where inflation is much higher with utilities prices up 1.9% over the year, health costs +3.2%, education 2.8% higher and alcohol and tobacco costs up by 6.8%. The CPI excluding volatile items is also weak at just 1.2% year on year and the US definition of core inflation (ie ex food and energy) is just 1.3%yoy.
- Meanwhile, credit growth remained soft in September with annual growth in housing credit to owner occupiers and investors continuing to slow and investor credit growth at its weakest on record.
Implications for interest rates
The September quarter inflation data confirms yet again that pricing power remains very weak and inflation is continuing to run around or just below the RBA’s 2-3% target band. There are no signs of any near-term significant price pressures in Australia, particularly with subdued wages growth and competition and technological innovation remaining intense. We remain of the view that the RBA won’t raise interest rates until late 2020 at the earliest and given the weakness in inflation, wages and the Sydney and Melbourne housing markets along with the uncertain outlook for consumer spending the next move being a rate cut cannot be ruled out.