Inflation pressures in Australia remain subdued, with the annual rate of price change in Q4 (1.5%) still well below the Reserve Bank’s 2-3% policy target range. The modest inflation undershoot today, however, probably is not sufficient to trigger further interest rate cuts from the RBA. Yes, last year’s twin rate cuts each followed closely on the heels of inflation undershoots but, in our view, these won’t be repeated this year, for two main reasons.
First, there is enough evidence in today’s inflation report to suggest that annual inflation has bottomed out for this cycle. The annual rate of inflation tumbled to just 1.0% through the middle of 2016, but rose to 1.4% in Q3 reported three months ago, and rose again today, albeit by less than economists had expected. Moreover, earlier global disinflation forces have eased, with measured inflation in key offshore economies rising, including in the US. This ultimately should start to be reflected in modest domestic price pressures this year.
Second, the RBA’s forecasts published back in November expected a low inflation outcome in the Q4 data, so today’s outcomes will not come as surprises to officials. Moreover, commentary from senior officials late last year implied they are content with current policy settings, despite the Q3 national accounts revealing a contraction in real GDP. The economic data to hand for Q4, though, implies that another fall in GDP for the December quarter is unlikely.
To today’s figures, the headline CPI rose 0.5% q/q last quarter, below economists’ expectations of a 0.7% rise. This is a step down from the 0.7% q/q change reported for the previous quarter, but supportive base effects lifted the annual rate of inflation to its highest rate for 12 months.
The main core measure of inflation (the trimmed mean), which is calculated by removing volatile items, rose 0.4% q/q, the same rate of change as in Q3, but slightly on the weaker side of expectations. The annual change, therefore, dipped slightly to 1.6% (from 1.7%). This is a new low for this series, albeit only slightly below the previous mark set six months ago.
The main drivers of inflation last quarter were broadly as expected. There was a 7% rise in retail petrol prices over the quarter, mainly reflecting higher global oil prices. There also was a large rise in the price of tobacco (up 7.4%) thanks to the rise in the tax excise back in September, and material rises in the cost of domestic holiday fares and accommodation (up 5.5% over the quarter).
Partly offsetting these price rises were price falls for pharmaceutical products, down 2.6% q/q. Other important items that fell in price falls last quarter were the price of overseas holidays and accommodation, also down 2.6%. The large falls in prices for fruit and vegetables that economists had expected, after big rise sin earlier quarters, did not materialise in today’s report – prices for both rose again.