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Weak CPI To Keep RBA Rate Hikes At Bay

Don't expect any change in interest rates from the Reserve Bank next Tuesday at its first monetary policy meeting of the year and don’t listen or believe what you might read from some commentators who say the latest inflation figures show cost pressures are starting to rise.

They aren’t and if it hadn’t been for government-sanctioned increases in the area of utilities, booze and tobacco, health costs and education, inflation would be a blip because of intensifying price competition in the private sector.

Data from the Australian Bureau of Statistics yesterday showed the December quarter Consumer Price Index rose 0.6% quarter on quarter or 1.9% over the year. The market had been expecting a 0.7% increase and 2.0% year on year.

The annual figure was still short of the RBA’s target of 2% to 3% over time for the third calendar year in a row.

Underlying inflation as measured by the trimmed mean and weighted median (favoured by the Reserve Bank) averaged 0.4% over the quarter and 1.9% over the year which also missed expectations of a 0.5% lift but year on year growth came in on expectations.

On an annual basis, inflation rose 1.5% in 2016, against the 1.9% jump in 2017 and 1.3% in 2016. The rise in the annual inflation rate was substantially due to the outsized cost hikes in the government sector or where government influences price movements (such as the cost of electricity, water and gas).

Inflation in the government-influenced parts of the economy was much higher with utilities prices up 9.2% over the year, health costs +4.0%, education 3.2% higher and alcohol and tobacco costs up by 7.3%.

The AMP’s Chief Economist, Dr Shane Oliver pointed out that in contrast to what was happening in the government areas, “Inflation in the private sector part of the economy is running at just 1.1% year as year (as measured by the “Market goods and services ex volatile items” index.

The largest prices rises were across petrol (up 10.4%) which was expected as oil prices rose sharply in the quarter, domestic holiday travel (+6.3%) which normally rises in the December quarter, tobacco (+8.5%) due to the government tobacco excise and fruit (+9.3%, after big falls earlier in the year). Over 2017 tobacco prices soared 15.2% while electricity prices climbed 12.4%.

“Despite these large price increases over the quarter, the overall weakness in price pressures across the economy more than offset these higher prices,” Dr Oliver pointed out.

Clothing and footwear prices again fell (-0.3%), furnishings and household equipment also fell (-0.8%), health prices were down (-0.5%) although this is seasonal, car prices continued to fall (-1.1%) and communication prices also continued to tumble (-1.3%). Even rents only rose 0.3% in the quarter or 0.7% year on year, Dr Oliver noted.

"The inflation data confirms that underlying pricing pressures in the Australian economy are still weak as the economy is still running below potential, competition in numerous industries (retail, insurance, finance, telecommunications) remains intense and the rise in the Australian dollar (it has rallied by another 3% since the beginning of the year) is helping to keep imported price growth low.

"The continuing low inflation backdrop means that there is little chance of an imminent RBA interest rate hike. Headline and underlying inflation is still below the RBA’s inflation target of 2-3% and is expected to remain there for a while yet.

"While there are areas of strength in the Australian economy (the labour market is strong, business confidence is high and consumer sentiment is lifting, strong commodity prices are good for export income), the low inflation and wages backdrop, risks around home prices and high household debt and the high Australian dollar all indicate that it’s still too early for the RBA to start raising interest rates. We remain of the view that the RBA won’t start lifting rates until late this year, starting with a 0.25% rate rise,” Dr Oliver said.

But the rise in inflation wasn’t uniform and the ABS' chief economist Bruce Hockman noted in yesterday’s statement there were price pressures in some parts of the country but others, particularly Perth, were subdued.

"While the annual CPI rose 1.9 per cent, annual inflation in most East Coast cities rose above two per cent, due in part to the strength in prices related to housing” he said.

“Softer economic conditions in Darwin and Perth have resulted in annual inflation remaining subdued at 1.0 and 0.8 per cent respectively,” Dr Hockman wrote.

View More Articles By Glenn Dyer

Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.

At the AFR he was a finance writer, Finance Editor, News Editor and Chief of Staff. At the Nine Network he was supervising producer of Business Sunday for more than 16 years. He has also written for other online and analogue print publications here and overseas.



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