Predictably, Australian inflation slowed sharply in the three months to December, thanks to falling oil and petrol prices, while underlying cost pressures (which the Reserve Bank looks at) remained solid, but well inside its 2% to 3% target range.
But buried in the report was enough evidence of solid underlying inflation so as to rule out a rate cut when the reserve Bank meets next Tuesday.
The Australian Bureau of Statistics said yesterday the Consumer Price Index rose 0.2% in the December quarter, down from 0.5% in the September quarter. The annual rate slowed to 1.7% from 2.3%, and a recent high of 3% in the same quarter of 2013.
Among the major capital cities, Adelaide had a slightly higher rise, at 0.3%, while Perth, Hobart and Canberra were all 0.1%. Sydney, Melbourne, Brisbane and Darwin saw a rise of 0.2%, right on the national average.
It was the first time headline inflation has fallen under 2% in 18 months, but don’t start looking for a rate cut from the Reserve Bank. The dollar rose more than half a cent to just under 80 cents just before midday and remained there over the rest of the day and the night’s trading.
The ABS said the prices rose because of increases in the cost of domestic travel and accommodation (usual at the end of the year as the long summer holiday break approaches), while tobacco cost more (because of rises in excise) while the housing boom pushed costs higher as well. Offsetting in part was a sharp fall in the cost of petrol to five year lows.
"The most significant price rises this quarter were for domestic holiday travel and accommodation (+5.8%), tobacco (+4.8%) and new dwelling purchase by owner-occupiers (+1.1%), These rises were partially offset by a fall in automotive fuel (–6.8%). Global oil markets continue to experience oversupply, which resulted in continued falls in oil prices. In Australia, average unleaded petrol prices reached a low of $1.17 per litre in December 2014, the lowest recorded average daily price since February 2009,” the ABS said.
Australian inflation has fallen, but has been lower in a quarter on several occasions in the past five years (in 2010-11, for example) and lower on an annual rate as well. Inflation is not dramatically lower as it has become in the US and most parts of Europe and UK since the fall in oil prices accelerated in November.
But there were those signs of underlying inflation that will attract the central bank’s attention.
The Reserve Bank’s preferred measures, the trimmed mean and weighted median, both rose 0.7% in the quarter, slightly faster than the rises of 0.4% and 0.6% in the September quarter, indicating there were underlying inflation pressures flowing from the fall in the value of the dollar.
But over the year to September, the trimmed mean rose 2.2%, down from 2.5% in the previous quarter, while the weighted median rose 2.3%, slowing from a 2.6% annual rate in the September quarter. So down slightly, but not dramatically so.
Source: ABS, AMP Capital
And it is that still solid, but slowing growth in underlying cost pressures that will make the Reserve Bank cautious about a rate cut, as demanded by the likes of Westpac and others, and tipped by more restrained analysts at the NAB and the AMP’s chief economist Dr Shane Oliver.
Dr Oliver wrote yesterday, ”There was little sign of higher import prices flowing from last year’s fall in the $A with tradeable prices falling 0.6%. However, this would have been swamped by the fall in fuel prices and in any case the $A only really started its recent fall late last year so its arguably too early to impact anyway.
"Going forward, headline inflation is likely to fall further with current petrol price levels pointing to a 25% fall in fuel prices in the current quarter if they are sustained which would knock 0.8 percentage points off inflation and result in a negative quarterly inflation rate in the current quarter (of around -0.2%qoq). Underlying inflation pressures are also likely to remain benign reflecting weak wages growth and economic growth continuing to run below trend.
"The December quarter inflation rate was not low enough to provide a smoking gun to bring on an immediate rate cut by the RBA next week. In fact, December quarter inflation was broadly in line with RBA expectations (of 1.75% CPI inflation and 2.25% underlying inflation) published in November’s Statement on Monetary Policy. And the RBA would likely prefer to drop its “period of stability” comments before easing. As such, while a rate cut next week is not out of the question it looks unlikely and foreign exchange traders seem to have taken a similar view in pushing the $A up about half a US cent after the CPI release (to $US0.7980).
"However, the sub target headline inflation and benign underlying inflation readings for the December quarter provide plenty of scope for the RBA to ease further. With growth in the economy remaining sub-par and confidence subdued further easing is likely to be necessary to provide a boost to non-mining activity. While the $A has fallen against the $US, on a trade weighted basis its decline is less significant as other central banks are also easing, eg Japan, the ECB, Canada and even Singapore today. And much of the recent fall in the $A owes to expectations of another RBA rate cut. If this does not eventuate the $A will likely rise (as seen in the reaction to the CPI). As a result, we continue to see the RBA easing in either March or April,” Dr Oliver wrote.
So re-read what RBA Governor Glenn Stevens said in his post meeting statement early last month and wait until next Tuesday afternoon, when an update will be issued. Watch what he says about inflation, the fall in the value of the dollar and then the final paragraph of his statement which will set the broad parameters of RBA policy for the coming months, especially the final two paragraphs:
"Looking ahead, continued accommodative monetary policy should provide support to demand and help growth to strengthen over time. Inflation is expected to be consistent with the 2–3 per cent target over the next two years.
"In the Board’s judgement, monetary policy is appropriately configured to foster sustainable growth in demand and inflation outcomes consistent with the target. On present indications, the most prudent course is likely to be a period of stability in interest rates.”
That still sounds about right.
