The headline CPI inflation measure for the second quarter has been released in line with market expectations. CPI was up by 0.4% for the quarter and up just 1% over the course of the year (the lowest annual plot since the second quarter of 1999). The average of the two “core” measures, trimmed mean and weighted average, which is the indicator more closely watched by the RBA was up 0.45% for the quarter and +1.5% from a year ago; well below the RBA target range of 2-3%. As a result the door for a possible rate cut at the Bank’s meeting next Tuesday remains well and truly open. However, the core plot was slightly higher for the quarter than had been expected and the market is therefore pricing a 25bps cut as only a 50:50 shot.
Despite communications and transport indexes falling heavily over the year (-7.2% and -2.8% respectively) it was actually the food and housing indexes that were the main drivers of the weak number. These two categories account for almost 40% of consumer spending and therefore have a major impact on the total weighted result. The food index fell 0.1% over the year which is the lowest annual result for over 3 years while housing, on the back of record low interest rates, was up just 1.3% for the year and is the slowest pace of growth since September 1998.
It’s always worth remembering that this inflation data is calculated based on a basket of consumer spending, and the prices of that basket, calculated as a weighted average across the capital cities only and as a result may not be wholly representative of the experience in regional areas.