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After the release last week of the low CPI numbers, and the RBA’s subsequent decision to cut rates by 25 bps yesterday (see below), it comes as no surprise to see the quarterly Cost of Living Indexes confirming the lack of any inflationary pressure.
The COL Indexes are designed to answer the question “By how much would after tax money incomes need to change to allow households to purchase the same quantity of consumer goods and services that they purchased in the base period?” They consider this question for a variety of household types (given the different expenditure patterns of households). For the March quarter we see that prices fell or remained the same from the previous quarter for all household types with annual changes dropping for most. Indeed all household types saw cost of living increases over the year below even the low Headline CPI print and well below the RBA’s preferred core inflation measure which stood at 1.55% for the year.
| Q/Q | Yr/Yr | |||
| Q4 | Q1 | Q4 | Q1 | |
| Pensioner & beneficiary | 0.4 | 0 | 1.3 | 1.1 |
| Employee | 0.5 | 0 | 1.1 | 1.1 |
| Age Pensioner | 0.2 | 0 | 1.2 | 0.8 |
| Other Govt Transfer Recipient | 0.6 | -0.1 | 1.4 | 1.1 |
| Self-funded retiree | 0.7 | -0.4 | 1.6 | 1.1 |
| Headline CPI | 0.4 | -0.2 | 1.7 | 1.3 |
Yesterday’s reduction in the Cash Rate by 25 bps to a new record low of 1.75% (which came as something of a surprise to us, if not to many others!..see commentary from last week) can be pinned squarely to not just the surprise fall in inflation. As the RBA made clear in its statement following the decision, the changes to regulatory control of lending in the property market was also a major factor allowing the Bank to move without fears of stoking an unwanted burst of property price inflation (as has been a past worry).
“In reaching today’s decision, the Board took careful note of developments in the housing market, where indications are that the effects of supervisory measures are strengthening lending standards and that price pressures have tended to abate. At present, the potential risks of lower interest rates in this area are less than they were a year ago.”
The Bank will be pleased that the fall in the A$ which occurred last week on the back of the CPI data, and the rise in expectation of a rate cut, has been extended further by the cut itself. The A$ is now trading more than 2.5 US cents lower than it was prior to the CPI data last week. As the Bank notes in its statement..
“Monetary policy has been accommodative for quite some time. Low interest rates have been supporting demand and the lower exchange rate overall has helped the traded sector. Credit growth to households continues at a moderate pace, while that to businesses has picked up over the past year or so. These factors are all assisting the economy to make the necessary economic adjustments, though an appreciating exchange rate could complicate this.” (my emphasis)
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