Originally published by AMP Capital
- The Australian March 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.
- Underlying inflation, as measured by the trimmed mean and weighted median, averaged 0.5% over the quarter and 2.0% over the year which was broadly in line with expectations. Underlying inflation is the series that is focussed on by the RBA because it gives a smoother reading of fundamental price trends in the economy by excluding volatile price changes.
The largest price rises were across secondary education (+3.3%) which normally rises in the March quarter, gas (+6.0%) as energy prices remain high, pharmaceutical products (+5.6%) and medical and hospital services (+1.5%) which is another usual price increase seen at the beginning of the year and vegetable prices (+3.7%) as a result of supply disruptions. Despite these large price increases over the quarter, overall weakness in inflationary pressure across the economy remains in place and is keeping inflation at or below the bottom of the RBA’s target range. Clothing and footwear prices fell 2% indicating continuing pressure on retailers to discount, prices for furnishing and household goods are continuing to fall, holiday travel prices fell 2.4% which is typical in the first quarter of the year and communication and computing goods prices remain under pressure.
The inflation data confirms that underlying pricing pressures in the Australian economy are still weak as the economy is still running below potential and competition in numerous industries (retail, insurance, finance, telecommunications) remains intense.
Interestingly, there remain a wide dispersion in price growth across the various consumer spending components. 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 9.3% over the year, health costs +4.2%, education 2.6% higher and alcohol and tobacco costs up by 7.0% (see chart below).
Implications for interest rates
The inflation data confirms that the bottom in inflation for this cycle has occurred. But, price growth is only running at or just below the bottom end of the RBA’s 2-3% target band and there are no signs of any near-term significant price pressures in Australia, particularly with subdued wages growth. So the RBA is likely to remain on hold. Our base case is for a rate hike in the first quarter of next year but ongoing soft growth, low inflation, low wages growth and the tightening in bank lending standards now underway around borrowers’ income and expense levels indicates that the risk is that the RBA will remain on hold for much longer and that another rate cut cannot be ruled out.