No surprises, and no change from RBA expected, in latest inflation numbers

Today’s release of the final quarter 2017 inflation data was broadly in line with market expectations and therefore met by something of a collective yawn by watchers and traders alike. The headline CPI rose 0.6% q/q for a y/y increase of 1.9% (up from +1.8% y/y in the previous quarter). While the market had originally been expecting something more like +0.7%/+2.0%, last minute discussions had focused on down-side risks with some suggesting that a figure as low as +0.4%/+1.7% might be on the cards. As a result the actual result did little to stir the market with the A$ returning to levels seen earlier in the day after something of a minor move up just before the release, and a similar move down as the number came out (although movements in the past hour have now pushed somewhat lower again).

The more closely watched series (at least by the RBA), the trimmed mean and weighted median (otherwise known as “core inflation“) were both up 0.4% q/q for an average y/y increase of 1.9%; slightly higher than the 1.85% y/y last quarter. Next week’s RBA meeting (the first of 2018) is unlikely to see any change to the Cash Rate.

The CPI 17th Series was introduced today. The more significant movements in category weightings saw Transport and Food & Non-alcoholic drink decline while Housing, Education and Insurance & Financial Services all increased slightly. For a full explanation of how the CPI is constructed and more details about the 17th Series see the ABS website here.

While many will argue about the concept of a Phillips Curve (see below), and the relationship between inflation and unemployment, we have found it to be a useful tool over the years. Perhaps interesting to note that there has only ever once been a plot of core inflation below 2% with an unemployment rate below 5.6% a year earlier (this happened in June 2011 in the midst of the GFC); our unemployment rate had fallen to 5.6% by June 2017 and has since dropped to 5.4%. We would suggest this points towards core inflation moving back into the RBA’s target range by the time we get the Q2 CPI number in July this year.


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