Don’t worry about the pick up in inflation the June quarter, it was expected, and won’t worry the Reserve Bank.
In fact on the more accurate core basis used by the RBA, inflation was actually a touch weaker in the quarter, once big moves in petrol and fuel, pharmaceuticals, fruit prices and the cost of holidays were stripped out.
But there is a message from the data that real wage growth remains weak and millions of Australian workers probably went slightly backwards in the quarter.
The Australian Bureau of Statistics (ABS) said yesterday that the Consumer Price Index (CPI) rose 0.7% in the June quarter 2015, following a rise of 0.2% in the March quarter 2015.
That saw the CPI rise 1.5% through the year to the June quarter, following a rise of 1.3% in the year to the March quarter 2015.
As expected, the ABS said the most significant price rises this quarter were in automotive fuel (up 12.2%), medical and hospital services (up 4.5%) and new dwelling purchase by owner-occupiers (up 1.5%). The ABS said the rise in the cost of fuel was “the largest since December 1990”.
But it should be pointed out that it came after a big fall in the preceding three quarters. In fact fuel had dropped 12.2% in the March quarter, which the latest rise neatly reversed. So in reality fuel prices rose back to levels seen in the 4th quarter of 2014.
According to the ABS these rises were partially offset by falls in domestic holiday travel and accommodation (down 5.4%) and pharmaceutical products (down 1.8%), while the cost of fruit fell 8%.
But the inflation readings that do matter revealed the weighted mean and trimmed median showed no real change, if anything they were a touch weaker. These are the figures the RBA monitors.
The quarter on quarter rise averaged out at 0.55% (0.6% in the March quarter) and the average yearly rate was unchanged at 2.3%, which is of no concern to the Reserve Bank.
But the 0.7% quarterly rise will almost certainly be higher than the expected rise in the wage price index from the ABS next month. That was a rise of 0.5% in the three months to March, which was faster than the 0.2% rise in the CPI (a rarity in the past year to 18 months).
The annual rate of 1.5% will still be slower than the 2.5% annual growth rate in wages, according to the March quarter index figures.
Unless there is another downturn in oil prices in the next year (a possibility with Iran yet to release up to a million barrels of day of extra production, if the nuclear deal with the six major western countries, led by the US, is approved), inflation is expected to gradually drift higher as the impact of the weakening Aussie dollar takes hold, putting further pressure on real wages.
The sluggish growth in wages has helped keep the labour market a bit stronger than expected, meaning tax revenues will be a little better.
But any prolonged weakness in real wages impacts household consumption and comes uncomfortably at a time of rising household debt (which for the moment is being offset in Sydney and Melbourne at least by rising house prices).
It is further confirmation the RBA is on the right track with official interest rates at 2% and no sign (or need) for another cut, unlike New Zealand where the punt is for a rate cut tomorrow morning, and probably another one later in the year, making three all told.
That will help our big four banks at a time when the local housing boom is getting tired (NZ’s will soon tire as well as the impact of lower dairy prices skewers household spending and growth).
