No rate cut from the Reserve Bank after the September quarter Consumer Price Index revealed a larger than expected quarter on quarter rise of 0.7% from the 0.4% in the three months to June. Economists had been looking for a rise of 0.5% from the June period, so the higher result was not too much of a surprise, or a worry.
The reading pushed the annual rate up to 1.3%, from the 1.0% rate in the year to June 30.
The news boosted the value of the Aussie dollar past the 77 US cents level – last Saturday morning it had closed at just over 75 US cents, so the currency has now regained most if not all of its losses of last week.
The rise in the headline rate follows small increases in New Zealand, The US, UK, China and the eurozone in the September quarter or the month of September. Economists say this is a sign that inflation is starting to turn up again after a year or more of disinflation, or outright deflation, thanks to falling oil prices and low or non-existent demand, especially for consumer goods and intense price cutting.
On the Reserve Bank’s more favoured measures, – the trimmed mean and the weighted median – inflation did not budge in the year to June at 1.5%. On a quarter on quarter basis they were however weaker at 0.4% against 0.45%.
The readings will confirm the RBA’s decision to sit and watch to see how growth pans out, the results of the US November 8 Presidential poll and then the December meeting of the US Federal Reserve which is still expected to push up rates.
But while inflation remains weak, we are getting solid economic growth – and some jobs growth (if the muddled data in the Bureau of Statistics Labour Force series can be unravelled). Solid growth and low inflation is a good policy outcome. More certainty on what is happening in the jobs market would be even better.
But it does mean that the cash rate’s current level of 1.5% is as low as it will go unless there’s a sudden worsening of global economic growth or Donald Trump wins the US election for President.
The Bureau of Statistics said the rise was driven by a strong rebound in the cost of fruit and vegetables (especially tomatoes), up 19.5% and 5.9% respectively. Electricity costs rose 5.4% and tobacco 2.3% as the now usual quarterly indexed cost increase kicked in.
Offsetting these rises were small falls of 2.9% in the cost of fuel and 2.5% in the cost of telecommunication equipment and services.
The ABS said the rise in fruit and vegetable prices is due to adverse weather conditions, including floods, in major growing areas, impacting supply. In other words, there was a cost to the breaking of the El Nino dry weather pattern.
Economists expect that impact to continue this quarter, although there was been a noticeable easing in fruit and vegetable costs in supermarkets and stores in the past three weeks.
Higher fuel costs will also be more noticeable this quarter and in the March period as oil prices will be higher than they were a year ago.
AMP’s Chief Economist wrote yesterday “inflation is still very low, it’s not clear that it has bottomed yet and the $A remains uncomfortably high so it’s premature to close the door on another rate cut.
“Overall, we think that the RBA will leave rates on hold when it meets again next week, but that another cut (more likely next year) cannot be ruled out."
