Economists think that headline inflation will surge from the March quarter’s annual rate of a weak 1.1% to more than 3% in the current June quarter.
AMP chief economist Shane Oliver in fact thinks it will hit an annual rate of 3.7% – because the fall of 1.9% in the June 2020 drops out of the comparison.
That will get the bond bunnies and ‘rate rise looms’ mob all worried about cost pressures and interest rate rise – worries that are needless.
The reality is that the lack of significant cost pressures we saw in the three months to March will not vanish in the current three months.
Dr Oliver wrote yesterday in a commentary:
“… the underlying measures of inflation that strip out volatile price moves were all weaker than expected suggesting that pricing power generally remains weak – the trimmed mean rose 0.3%qoq taking its annual rate to just 1.1%yoy which is a record low, weighted median inflation rose just 0.4%qoq or 1.3%yoy and the prices for market sector goods and services excluding volatile items rose just 0.2%qoq.
“The rise in market sector prices was its lowest in two years and while some good prices have increased reflecting bottlenecks (eg vehicle prices up 5.7%) the impact is less than has been feared with market sector good prices ex volatile items moving up just 0.1% in the quarter. While services sector inflation may be rising it looks to be getting offset by a faster slowdown in goods price inflation,” he wrote.
The 0.6% quarter on quarter rise was much weaker than the forecast 0.9% and the 1.1% annual rate was weaker than the forecast 1.4%.
And if that is repeated this quarter with the annual rate rising to 3% or a bit less, than it will be a sign that the RBA’s worries about the negative impact of spare capacity in the economy, remain very real.
The CPI result for the March quarter makes it clear that meeting the RBA’s target for thinking of a rate rise is now even further away.
The target, last published in the minutes of the April monetary policy meeting, said
“The Board will not increase the cash rate until actual inflation is sustainably within the 2 to 3 per cent target range. For this to occur, wages growth would need to be materially higher than it is currently.
“This would require significant gains in employment and a return to a tight labour market. The Board does not expect these conditions to be met until 2024 at the earliest.”
The CPI on both the headline and underlying/core readings not the result that the Reserve Bank would have been hoping for because the data clearly shows the economy remains weak, that the spare capacity is pressing down on the ability of businesses to increase prices and in turn limiting the ability of workers to win pay rises.
There was a clear easing in the pace of cost pressures at a time when economic activity is buoyant – retailing remains solid, home building is booming, the trade account likewise, online is doing well and the only black spots are border related constraints on migration, tourism (inbound and outbound) and inbound education.
The key underlying inflation measures favoured by the Reserve Bank tell that story with the lowest annual growth rate on record for the trimmed mean – just 1.1%, dipping from the 1.2% reading for the December quarter and last year as a whole.
The weighted median, the other core measure was up 1.3% over the year. The two underlying measures were up an average 0.35% for the quarter, which is heading towards intense disinflation and suggest there is little way businesses can recover the obvious rises in raw material and input costs by putting up prices.
The weak result for the quarter came despite an 8% plus jump in petrol prices in the quarter, higher beef and veal prices, jewellery and accessories while furniture cost fell and the federal government’s Home Builder scheme helped keep a lid on housing costs, as did similar schemes in several states.
Tertiary education costs also fell but the Federal government’s resetting of the Medicare and Pharmaceutical Benefits Scheme safety nets saw a 5.3% rise in pharmaceutical product costs. Vehicle prices were up 5.7% as well.
Dr Oliver says that some of the dampening factors last quarter will ease up till June and into the September quarter
“The dampening impact on new dwelling costs will also fade as HomeBuilder has now ended although its impact will continue for a while yet as its paid out beyond the March deadline for applications.
“However, with general pricing power remaining soft, consumer spending likely to rotate back towards services taking pressure off good prices and wages growth likely to remain weak underlying inflation is expected to edge up only gradually resulting in both headline and underlying inflation being below target at the end of next year,” he wrote yesterday.
“The bottom line is that the RBA will remain dovish. While we see the RBA’s first rate hike coming in second half 2023 which is a bit earlier than the RBA’s “2024 at the earliest” that’s still more than two years away.
“In the meantime, the lower-than-expected inflation rate in the March quarter increases the chance that it will roll its 3 year bond yield target to the November 2024 bond from the April 2024 bond,” Dr Oliver forecast.
