‘Move along, nothing much of importance to see’ in yesterday’s March quarter Consumer Price Inflation data except that the annual rate of 2.1% is back at the bottom end of the Reserve Bank’s headline range of 2% to 3% ‘over time’.
The quarter on quarter rate was 0.5% in the March quarter, the same as reported for the three months to December.
It is the first time since the September 2014 quarter that the year on year rate has jumped into the RBA’s 2%-3% target range.
Perhaps the biggest influence on the annual rate was the dropping out of the March, 2016 fall in the CPI of 0.2%.
Underlying inflation, which strips out volatile price movements, was 1.8% over the year, after a quarterly rise of 0.45%. The quarter on quarter rate was up from 0.4% in the December quarter and an annual rate of just over 1.5%.
The Bureau of Statistics said the most significant price rises this quarter were automotive fuel (up 5.7%), new dwelling purchase by owner-occupiers ( up 1.0%), medical and hospital services (up 1.6%) and electricity (up 2.5%). The latter two were in reaction to government driven cost rises.
The most significant offsetting price falls this quarter are international holiday travel and accommodation (down 3.8%), fruit (down 6.7%) and furniture (down 3.5%).
The AMP’s chief economist, Dr Shane Oliver said yesterday in a note that “While the March quarter inflation result slightly disappointed expectations, the RBA would be happy that inflation is moving in the right direction (into its 2-3% target band).”
"But, underlying inflation is still too low and will probably remain below the RBA’s target band for the majority of 2017. Wages growth still remains around record lows, the economy is running below-trend which indicates that spare capacity exists and the $A remains too high all which will keep a lid on underlying inflation.
"There are some near-term upward pressures to headline inflation over the next few months including higher electricity prices and the impacts of Cyclone Debbie in Queensland (which should only add around 0.2 percentage points to headline inflation). But, besides these disruptions, we still see underlying inflation remaining weak for some time.
"Our base case is that with inflation moving in the right direction and given the RBA’s increased emphasis on an inflated Sydney and Melbourne housing market and rising household debt the RBA is unlikely to make any adjustments to interest rates any time soon and we expect it to keep the cash rate at 1.50% for the next year at least. However, low underlying inflation pressures mean that there is still more chance of a rate cut this year than a rate hike,” Dr Oliver wrote.
And JP Morgan’s Ben Jarman came up with perhaps most perceptive analysis, writing in a not yesterday afternoon:
"The details of today’s report also were negative. There is no verve in bellwether measures of inflation that tend to drive the cycle, with most inflation accounted for by oil, seasonality, and administered prices.
"Indeed the ABS measure of ‘market prices ex-volatile items’ printed inflation of 0%q/q, and 1.0%oya. The bottom-up drivers of a sustainable core inflation recovery are not at evident at this point.
"Further, the few supportive elements active in recent prints, fuel in particular, and also home-building, should not be contributing much more from here. This suggests that medium-term headwinds to the RBA hitting the inflation target remain significant.”
But what this CPI reading will mean is if there is no change in wage price growth in the March quarter from December’s 1.9%, it is highly likely that Australian workers will have seen a fall in real wages in the first quarter of this year.
The RBA holds its next monthly board meeting on Tuesday and will leave the cash rate at a record low 1.5%.
