The chances of a rate cut from the Reserve Bank are now firmer after the March quarter Consumer Price Inflation (CPI) report revealed a much larger fall in cost pressures than expected.
The Australian Bureau of Statistics (ABS) reported that the CPI was flat in the three months to March, while the annual rate tumbled to just 1.3% from 1.8% in the year to last December.
While the RBA has made it clear the strength of the jobs market and its intersection with weak GDP remains its major area of interest, the sharp fall in consumer price inflation in the first three months of this year will add to the central bank’s policy dilemma.
Certainly, there was no clarity from the RBA’s preferred inflation measures – if anything they exposed the weakening price pressures in the economy.
The core inflation rate as measured by the RBA’s preferred measures – the Trimmed Mean (up 1.6% and down from a, upwardly revised 1.8% in December) and the Weighted Median (up 1.2% but down from a revised upwards reading of 1.6%). That produced a combined average rate of 1.4% – down from the revised upwards reading of 1.7% in the December quarter and lower than the central bank’s forecasts in February of 1.8% for the CPI and the Trimmed Mean in the six months to June.
The CPI and the core measure would have to accelerate this quarter for the RBA measure to be met.
That could happen, but looking at the factors behind the latest CPI reading shows the rate fell despite the clear impact of the drought and big price falls in the costs of services (and fuel prices, which will reverse this quarter though).
Data on price rises in the tradables segment (goods and services exposed to global competition) and non-tradables (goods and services not so exposed to global competition) revealed a slowing in price pressures and highlighted the RBA’s policy dilemma.
The ABS data showed the tradable component of the CPI fell 0.6% in the March quarter thanks to the 8.7% fall in oil and fuel. The tradable services component fell 2.0% due to lower international holiday, travel and accommodation (-2.1%).
Oil and petrol prices are expected to rise this quarter as global price levels hit six to seven-month highs but how far will that go to offsetting price falls elsewhere?
The non-tradables component of the CPI rose 0.3% in the March quarter 2019. The non-tradable goods component rose 0.4%, due to a 5% rise in the price of pharmaceutical products. The non-tradable services component rose 0.3% due to a 4.2% rise in the cost of secondary education.
The ABS said that over the twelve months to the March quarter, the tradables component rose 0.4% (0.6% in the year to December) and the non-tradables component rose 1.8% (down from an annual 2.4% rise and less than the bottom of the 2% – 3% target of the RBA and equal to the Trimmed Mean measure favoured by the central bank.
In seasonally adjusted terms, the ABS said the tradables component of the All groups CPI fell 0.4% (down 0.1% in the December quarter) and the non-tradables component rose 0.2% (up 0.8%).
If a rate cut happens these measures will be the factors that tip the RBA’s hand.
The ABS said in commentary on the CPI “The March quarter 2019 CPI was a result of price rises in a number of goods and services being fully offset by a number of price falls. This was consistent across most of the capital cities.”
“The most significant rises in the March quarter were vegetables (+7.7 percent), secondary education (+4.2 percent) and motor vehicles (+2.4 percent). Drought and adverse weather conditions continue to reduce the supply of a selection of fruits and vegetables.
These rises were offset by falls in automotive fuel (-8.7 percent), domestic holiday, travel and accommodation (-3.8 percent) and international holiday, travel and accommodation (-2.1 percent).