Inflation remains below RBA target; it’s Tradables keeping it there.

The ABS release of Q3 CPI this morning has come in slightly below market expectations with core inflation remaining stuck just below the bottom of the RBA target range.

CPI posted a 0.6% q/q increase for the Sept quarter (market expectations had centred around +0.8%) which meant year-on-year inflation fell slightly to 1.8% (from 1.9% in Q2). However, the two “core” measures which will be the indicators most closely watched by the RBA (trimmed mean and weighted median) came in at +0.4% and +0.3% q/q for y/y increases of 1.8% and 1.9%. The average “core” inflation measure therefore remained unchanged from Q2 at +1.85% y/y.

What is clear from the chart below is that it’s Tradables inflation (i.e. those items impacted by a stronger A$) that is keeping price pressures so low. Non-tradable inflation is currently running at 3.2% y/y (its highest level since the end of 2013) while Tradables is back into negative territory (-0.9% y/y) for the first time in 2 years. The oft-noted desire of the RBA to see the A$ weaken further would certainly go a long way to helping core inflation move back to their 2-3% medium term target. They will therefore no doubt be delighted to have seen the Aussie lose half a cent to the $ after the CPI number was released, and to be down about 1.5 cents in the past 5 days.

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