Unlike the very obvious rate cut-justifying March quarter reading of minus 0.2%, the Consumer Price Index bounced back into positive territory in the three months to June – but with a rise of just 0.4% in headline inflation, compared with the March period fall of 0.2%, leaving the chances of a rate cut from the Reserve Bank next Tuesday a strong possibility, but no more.
While that was right on market forecasts, it also saw the annual rate dip to 1.0%, the lowest annual rate since 1999, according to the Australian Bureau of Statistics report.
That means we will be subjected to the usual ‘will they, won’t they’ commentary about whether this means a rate cut from the Reserve Bank when its policy making board meets next Tuesday.
On balance a rate cut wouldn’t surprise, but another month of sitting pat by the RBA also would not be a shock. 21 of 23 economists surveyed by Bloomberg reckon there will be a rate cut next Tuesday.
The AMP’s Chief Economist, Dr Shane Oliver is one of those and reckons on balance, the RBA will cut, as he explained in a note issued yesterday afternoon.
The June quarter inflation data is not low enough to make an RBA rate cut at next week’s meeting certain particularly given that recent economic data has been reasonably good.
“However, on balance we expect that the RBA will move again to help ensure that inflation expectations do not become entrenched below 2% as has been the case in several other countries, so that there is reasonable confidence that inflation will move back into the target zone in a reasonable time frame and to head off a rebound in the $A that will likely follow if it doesn’t cut again."
The RBA looks at its two preferred measures, the Trimmed mean and Weighted median and there the news wasn’t as clear cut as it seemed in the March quarter. The Trimmed mean rose 0.5% in the three months to March, from the March quarter when it rose by just 0.2%.
And the Weighted median showed a similar jump – up 0.4% against just 0.1% in the March quarter. That meant the annual rate of the two was unchanged at 1.5% down from 1.55% in the March quarter.
Source: AMP, ABS
Looking at what the ABS said were the drivers in the 0.4% rise in headline inflation, it said "The most significant price rises this quarter are in medical and hospital services (+4.2 per cent), automotive fuel (+5.9 per cent) and tobacco (+2.1 per cent). These rises are partially offset by falls in domestic holiday travel and accommodation (–3.7 per cent), motor vehicles (–1.3 per cent) and telecommunication equipment and services (–1.5 per cent).
"The increase of 4.2 per cent for medical and hospital services was driven by the annual increase in Private Health Insurance (PHI) premiums, which rise on 1 April every year.
“The increase of 5.9 per cent for automotive fuel follows three consecutive quarterly falls, with the rise driven by increases in unleaded, premium and ethanol fuels, as world oil prices increased from a 12-year low last quarter.”
The ABS said the CPI rose 1.0 per cent through the year, was the lowest annual rise since the June quarter of 1999 (When John Howard was PM and Peter Costello Federal Treasurer).
And that contains a couple of clues as to whether the RBA will cut next week – the rise in medical and hospital services happens in the second quarter of most years because of the timing of annual health fund cost rises from the Federal Government.
Fuel costs were always going to rebound from the lows earlier in the year, and it should be pointed out that they have fallen sharply since their most recent peaks.
Tobacco was down to Federal Government excise increases. In other words these were not cost rises linked to the health of the economy. But the rises in the two measures favoured by the RBA do suggest there were some cost rises in the economy during the period that were passed on to customers.
But the bottom line is that inflation remains well under the RBA’s target range of 2% to 3% over time, and there is little in the ABS report that suggests any change to that situation for some time.
In fact price increases for non-tradeable items remain weak at just 1.6% year on year, and tradeable prices were flat year on year despite the downtrend in the Australian dollar.
Dr Oliver says that “Highlighting the weakness in inflation, prices for market goods and services excluding volatile items are up just 1.2%yoy, indicating that pricing power in the private sector remains very weak."
So given that, what will the RBA do? Well the minutes of the July board meeting are the latest views of the central bank.
"Inflation was still expected to remain quite low for some time given very subdued growth in labour costs and very low cost pressures elsewhere in the world…Measures of inflation expectations – from consumers, market economists, union officials and financial markets – had remained below average.
"Taking account of the available information, the Board judged that holding monetary policy steady would be the most prudent course of action at this meeting.
"The Board noted that further information on inflationary pressures, the labour market and housing market activity would be available over the following month and that the staff would provide an update of their forecasts ahead of the August Statement on Monetary Policy.
“This information would allow the Board to refine its assessment of the outlook for growth and inflation and to make any adjustment to the stance of policy that may be appropriate.”
And Dr Oliver added “Quite clearly, deflationary pressures globally are continuing to be imported to Australia and intense competition domestically (eg between the major supermarkets and increasingly Aldi) and historically weak wages growth are keeping price pressures low and inflation below target." And if the RBA believes that, as it seems to with previous comments on the way low inflation is currently entrenched in the economy, we will get a cut in the cash rate to 1.5% next Tuesday.
