Data released this morning by the ABS shows that the Consumer Price Index (CPI) measure of inflation ticked up to 3% for the year to June (from +2.9% in Q1). Data for the second quarter shows that prices rose 0.5% after a 0.6% increase in Q1.
While the headline data shows inflation moving to the top of the RBA’s target band of 2-3% the RBA themselves will be more focused on two “core inflation” measures; the Trimmed Mean and the Weighted Median. These measures remove some of the volatility from the price index and will give the Bank a more realistic picture of the true trajectory for prices. However, the story is a similar one. Trimmed Mean rose 0.7% for the quarter and 2.9% for the year while the Weighted Median was up 0.6% q/q and +2.7% y/y. The average of these two core measures for Q2 was +0.7% q/q and +2.8% y/y which is a slight move up from the data last quarter which stood at +0.6% q/q and +2.65% y/y.
What all this means is that any chance (remote, in our view) of another rate cut from the RBA has now been made even less likely. The forex markets have certainly taken that view with the A$ rallying about half a US cent after the release.
It is worth noting that since the Cash Rate was cut to 2.5% we have seen average core inflation increase from 2.4% to 2.8%. As a result the “real” Cash Rate (adjusted by core inflation) has been negative for the past 3 quarters. The last time we saw a negative real Cash Rate was in 2009 following the slashing of the Cash Rate (from 7% to 3%) in response to the GFC. At that time average core inflation was still running some 0.5% above the RBA’s target, but by the time it fell below 3% again the Cash Rate had already been hiked to 4.5%. We are not expecting a hike from the RBA any time soon but certainly believe that the next move will be up (potentially by the end of this year).
The CPI data for Brisbane shows an increase of 0.6% q/q and +3.2% y/y.
Among the more interesting price changes for the year are:
Alcohol & Tobacco +7.1%; Education +5.1%; Insurance & Financial Services +1.0%; Communications -0.3% and Clothing & Footwear -0.6%.
Note that CPI is calculated using a basket of goods and services but is calculated ONLY in the capital cities and as such there may be significant differences when comparing price changes in the regions