Headline inflation in Australia

Headline inflation in Australia

Headline inflation in Australia printed at 2.5%oya in 1Q (J.P.Morgan 2.6%, consensus 2.8%), falling back within RBA’s 2-3% target range for the first time since 3Q07. The result was sharply lower than the 3.7% recorded in 4Q and the 5.0% recorded in 3Q. From the previous quarter, consumer prices grew a mere 0.1%q/q (J.P.Morgan 0.2%, consensus 0.5%), after contracting in the final three months of 2008 by 0.3%; this had been the first quarterly fall since 2006. The price changes in the CPI components were mostly in line with our expectations. The significant moderation in headline inflation stemmed from price falls in automotive fuel (-8.1%) and deposit and loan facilities (-14.1%) as interest rate margins narrowed in the wake of aggressive cuts to the RBA’s official cash rate. The fall in deposit and loan facilities was much sharper than expected, however. Excluding the financial and insurances services component, of which deposit and loan facilities make up 4.5%, the CPI would have risen a solid 0.8%q/q (or 2.8%oya) in the March quarter. Such volatile movements were removed from the RBA’s core measures of inflation. After moderating sharply in the previous quarter, growth in the RBA’s trimmed mean and weighted median accelerated considerably, rising 1.0%q/q and 1.2%, respectively. The most significant price rises in the first three months of the year were in food, utilities, rents and pharmaceuticals. Pharmaceutical prices posted the largest rising (+13.0%q/q) in 1Q, owing to the standard cyclical reduction in the proportion of consumers qualifying for subsidised medication under the Pharmaceuticals Benefit Scheme (PBS) at the start of each year.

On-year-ago growth in tradable and non-tradable inflation in 1Q, at 0.8% and 3.4%, respectively, printed at nearly half the annual rates recorded in the previous quarter. From the previous quarter, though, the tradable component, representing 42% of the CPI, rose 0.5%, owing mainly to increases in pharmaceuticals and vegetables, but partly offset by the fall in automotive fuel prices. The non–tradable component fell 0.1%q/q, again owing to the sharp drop in the deposit and loan facilities component.

With respect to monetary policy, this week’s inflation reports (PPI was released Monday) will not be setting alarm bells off at the RBA. That said, though inflation issues have moved to the back burner, the rise in the core measures of inflation reaffirm our view that the RBA will stand pat in coming months. We do, however, forecast further cuts to the cash rate in the latter six months of the year, with a 25bp cut forecast in August. Waiting until August would allow the RBA time to assess the impact of the significant amount of policy stimulus already delivered. It also would allow time to assess any further reaction from the commercial banks to the recent rise in wholesale funding costs, noting that two of the largest domestic banks this week raised rates on their fixed rate loans; this will impact the deposit and loan facilities component of the CPI in 2Q. Further, the argument that the RBA wants to preserve monetary policy power for use when unemployment soars remains valid, so a plausible case can be made for officials to wait until the second half of the year before delivering further policy support.

ENDS

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