Originally published by AMP Capital
- September quarter Consumer Price Index data showed headline inflation of 0.6% quarter on quarter or 1.8% year on year. This was less than market expectations for a 0.8% quarter on quarter rise.
- Underlying inflation as measured by the trimmed mean and weighted median averaged 0.4% qoq or 1.9% yoy. This was also less than expected.
While electricity prices rose 8.9% qoq and gas prices rose 5.2% qoq which was pretty much as expected, tobacco prices rose 4.1% thanks to an increase in tax and international holiday travel costs also rose 4.1%, the impact was more than offset by underlying price weakness elsewhere in the economy.
Weak underlying pricing pressures are broad based and indicated by weak or falling prices for most food items, clothing prices (down 3.2% yoy), rents (only up 0.5% yoy), furnishings (down 3.1% yoy) and most household items, cars (down 1.2% yoy) and telecommunications (down 3.2% yoy).
Weak underlying demand in the economy and competition in retailing (which may intensify when Amazon (NASDAQ:AMZN) arrives) is driving weak underlying inflation but the rise in the Australian dollar so far this year by pushing down import prices has added to it.
The weakness in demand mainly reflects record low wages growth but the surge in energy prices will have added to it as it acts like a tax on spending power in reducing discretionary income.
It is also worth noting that inflation in the private sector part of the economy is running at just 1.2% year on year as measured by the “Market goods and services ex volatile items” index. Inflation in the government affected parts of the economy is running much higher with prices for alcohol and tobacco up 7% yoy (thanks to tax hikes), utilities up 8.9% yoy, health up 3.9% yoy and education up 3.1% yoy.
Implications for interest rates
There is no imminent Reserve Bank of Australia (RBA) interest rate hike here. Headline and underlying inflation is running below the mid-point of the RBA’s inflation forecasts and this is likely to remain the case for a while yet. Our view remains that the RBA won’t raise interest rates until late next year as it will take a while for a gradual pick-up in economic growth to flow through to stronger wages growth and higher underlying inflation in the economy.
With the RBA on hold for the next year or so and the Fed on track to hike in December with another three hikes next year the interest rate differential will continue to move against Australia which should result in further weakness in the Australian dollar.