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maker.
Inflation: RBA alert but not alarmed
Consumer Price Index; Weekly Petrol
- The main measure of inflation in Australia – the Consumer Price Index (CPI) rose by 1.6 per cent in the March quarter, well above economist expectations centred on a 1.2 per cent increase.
The annual rate of inflation rose from 2.7 per cent to 3.3 per cent.
- Higher prices for fruit, vegetables, education, pharmaceutical and petrol were partially offset by lower prices for electrical and technology goods,
clothing, footwear, recreation goods, milk, bread, cars, pork and beef.
- The
Reserve Bank focuses on three “underlying” price measures – trimmed
mean, weighted median and CPIX (CPI less fruit, vegetables, petrol and
deposit and loan facilities). The trimmed mean rose by 0.9 per
cent (2.3 per cent annual); the weighted median rose by 0.8 per cent
(2.2 per cent) and we estimate that CPIX rose 0.7 per cent (2.6 per
cent).
- The
average of the Reserve Bank’s “underlying” measures of inflation –
weighted median and trimmed mean – held at 2.3 per cent in annual terms.
- According to the Australian Institute of Petroleum,
the national average Australian price of unleaded petrol fell by 0.5
cents per litre to 144.1 cents a litre in the week to April 24.
In the near term pump prices are likely to track sideways as the
strength of the Australian dollar offsets the sustained increase in
global fuel prices.
What does it all mean?
- The
latest inflation result is certainly on the high side of expectations,
with the quarterly increase of 1.6 per cent marking the highest reading
in a decade. However it is important to point out that the robust
inflation result was largely driven by one off items like the higher
food and vegetable prices due to the natural disasters, and seasonal
rises in education fees as well as pharmaceuticals. Added to which there
is not much the Reserve Bank can do about the
recent surge in oil prices and the flow on effect to domestic pump
prices.
- In recent
times the Reserve Bank has commented that it is willing to look through
the short term implications of the natural disasters and focus on the
longer term outlook. The latest result is unlikely to make
the Reserve Bank uncomfortable but certainly it will be more watchful in
coming months. The Reserve Bank cannot afford to over react on just one
set of numbers, especially given that in the near term the domestic
economy lacks momentum, while the strength of
the Australian dollar will continue to keep imported inflation low and
curb Aussie export industries.
- Importantly
last time round the underlying measures of inflation (excluding
volatile items) probably understated inflation while this time the
result was more than likely a little bit above. So on balance over
the past six month’s underlying inflation was closer to 0.6 per cent a
quarter. Even the annualised reading of underlying inflation posted at
2.3 per cent - suggesting inflation is still comfortably at the lower
end of the Reserve Bank’s target band of 2-3
per cent.
- The
domestic economy is expected to pick up speed in the second half of year
and no doubt the concern for policymakers will be if the higher
inflation reading becomes entrenched and feeds through the economy.
There is no question that inflationary pressures will remain the hot
button issue for the Reserve Bank over the midterm, and the key will be
how quickly labour markets tighten up. However it is important to
highlight that interest rates are already mildly restrictive
and as such CommSec expects the Reserve Bank to remain on the interest
rate sidelines well into the second half of the year.
What do the figures show?
Consumer Price Index
- The
All Groups Consumer Price Index (CPI) rose by 1.6 per cent in the March
quarter after rising by 0.4 per cent in the December quarter.
- In the March quarter 30 items were cheaper, 5 unchanged and 55 higher. The ABS notes that “The
most significant price rises this quarter were for automotive fuel
(+8.8 per cent), vegetables (+16.0 per cent),
deposit and loan facilities (+4.6 per cent), fruit (+14.5 per cent) and
pharmaceuticals (+12.5 per cent). The most significant offsetting price
falls were for furniture (–6.2 per cent), audio, visual and computing
equipment (–7.2 per cent), milk (–6.2 per cent),
overseas holiday travel and accommodation (–1.6 per cent) and motor
vehicles (–0.5 per cent).” The footwear and clothing index was at its lowest level since June 2000.
- The annual rate of inflation rose from 2.7 per cent in the December quarter to 3.3 per cent in the March quarter.
- Underlying measures of inflation were also higher in the March quarter. The weighted median measure rose by 0.8 per cent in the quarter, with the annual rate holding steady at 2.2 per cent – a
ten year low. The trimmed mean measure rose by 0.9 per cent in
the quarter with the annual rate rising from 2.2 per cent to 2.3 per
cent. And CommSec estimates that the CPI excluding fruit, vegetables, petrol and deposit and loan facilities (CPIX)
rose by 0.7 per cent in the quarter with the annual rate rising from 2.5 per cent to 2.6 per cent.
- Prices of tradables
rose by 1.8 per cent in the March quarter, with higher prices for
fruit, vegetables, automotive fuel, tobacco, and pharmaceuticals,
partially offset by cheaper, motor vehicles, audio,
visual and computing equipment and furniture. The annual growth rate of
tradables rose from 1.6 per cent to 3.3 per cent.
- Prices of non-tradables
rose by 1.4 per cent in the March quarter. Price increases for
electricity, house purchase and take away and fast foods were offset by
price for milk, domestic holiday travel and
accommodation and telecommunication. The annual rate of non-tradables
inflation fell from 3.5 per cent in the December quarter to 3.3 per cent
in the March quarter.
- Tradable
goods are those items whose prices are largely determined on the world
market. Non-tradable prices are more affected by domestic economic
conditions.
Petrol prices:
- According
to the Australian Institute of Petroleum, the national average
Australian price of unleaded petrol fell by 0.5 cents a litre to 144.1
cents a litre in the week to April 24. The metropolitan price fell
by 0.5 c/l to 143.4 c/l, while the regional average price fell by 0.4
c/l to 145.5 c/l.
- Average
petrol prices across states over the past week were: Sydney (up 0.9
cents to 144.9 c/l), Melbourne (down 0.2 cents to 143.1 c/l), Brisbane
(down 3.9 cents to 142.2 c/l), Adelaide (down 1.9 cents to 137.3
c/l), Perth (up 0.2 cents to 144.4 c/l), Darwin (up 0.1 cents to 149.5
c/l), Canberra (down 0.7 cents to 146.3 c/l) and Hobart (down 0.2 cents
to 149.2 c/l).
- The national average wholesale (terminal gate) eased by 0.6 cents a litre to 136.7 cents a litre today over the past week.
- Last
week, the key Singapore unleaded petrol price rose by US$3.10 (2.4 per
cent) to US$131.24 a barrel. In Australian dollar terms the Singapore
gasoline price rose by a much more sedate $0.11 (0.1 per cent)
over the week to $121.87 a barrel.
What is the importance of the economic data?
- The
Consumer Price Index (CPI) is regarded as Australia’s premier measure
of inflation. The CPI is published quarterly and measures price changes
for a ‘basket’ of goods and services that dominate expenditure
of metropolitan households. The “All Groups” index is the main focus,
but other inflation measures are also published such as so-called
‘underlying’ measures. These include measures that abstract from price
changes in volatile price items such as fresh food
and petrol.
- The
Reserve Bank aims to keep the headline inflation rate between 2-3 per
cent over an economic cycle. If inflation is high and expected to rise,
the Reserve Bank may elect to raise interest rates in order to
constrain price pressures. Conversely, if inflation is low and expected
to remain low, the Reserve Bank may elect to cut interest rates if it
believes the growth pace of the economy is in need of strengthening.
- Weekly figures on petrol prices
are compiled by ORIMA Research on behalf of the Australian Institute of
Petroleum. National average retail prices are calculated as the
weighted average of each State/Territory's
metropolitan and non-metropolitan retail petrol prices, with the weights
based on the number of registered petrol vehicles in each of these
regions.
What are the implications for interest rates and investors?
- The
simple fact is that the economy is going sideways, while consumers are
remaining conservative and refusing to spend unless goods are on
special. As long as consumers remain conservative and businesses have
to shave margins to move stock then underlying inflation will remain
low.
- The strength
of the Australian dollar continues to push down prices of imported goods
and services. Lower prices were recorded across a whole range of items,
from household appliances, clothes, shoes, tools,
sporting goods, and even cars. And the sluggish level of consumer
activity will continue to see retailers discount heavily, passing on
savings to consumers in coming months - keeping a lid on imported
inflation.
- The
Australian economy should pick up pace over the coming year, justifying
a further lift in interest rates over the latter part of 2011. The
floods around Australia and the resulting rebuilding phase have the
potential to
add to inflationary pressures in terms of building costs and sliding
unemployment. The key will be how quickly labour markets tighten up. If
wage inflation becomes an issue then the Reserve Bank would have to move
on the rate front.
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