CPI Data Shows RBA To Remain On Hold Until At Least 2020

CPI Index NumberOriginally published by AMP Capital

• The Australian June quarter Consumer Price Index showed headline inflation of 0.4% quarter on quarter or 2.1% 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 1.9% over the year which was broadly in line with expectations but is actually down from 2% year on year in the March 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.

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As expected prices rose for petrol (up 6.9% quarter on quarter), tobacco (+2.8% qoq) and health and clothing for seasonal reasons. But against this ongoing price weakness was evident in a whole range of areas including food, housing where rents were flat and are up just 0.6% yoy, household equipment and services where prices were up just 0.3% qoq and are down 0.5% yoy, motor vehicles where prices fell 2% in the quarter, communications, electronic goods and holiday travel. While clothing prices rose 1.3% in the quarter they are down 2% over the last year. While the $A has fallen, tradeable inflation is running at just 0.3% yoy.

The June quarter inflation data confirms that underlying pricing pressures in the Australian economy are still weak as the economy is still below potential, 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 2% to 1.9% yoy (or 1.865% to be precise), 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 8% over the year (even though they fell in the quarter), health costs +3.4%, education 2.7% higher and alcohol and tobacco costs up by 7.8% (see chart below). The CPI excluding volatile items is also weak at just 1.8% year on year.

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Implications for interest rates

The June quarter inflation data confirms yet again that, while we may have seen the bottom in inflation for this cycle in 2016, price growth is only running around 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 and competition and technological innovation remaining intense. We remain of the view that the RBA won’t raise interest rates until 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.