Summary: Deflation hits in June quarter; RBA preferred measure slows significantly; household services, childcare, fuel main deflationary sources; economist expect rebound in September quarter for headline rate but not for underlying.
In the early 1990s, entrenched inflation in Australia was broken by the “recession we had to have” as it became known. Since then, core consumer price inflation has averaged around 2.5%, which is coincidentally the midpoint of the RBA’s target range of 2%-3%. Following the GFC, various measures of consumer inflation have been in a down-trend despite attempts by the RBA to increase them through historically low cash rates.
Consumer price indices from the June quarter have now been released by the ABS and both the headline and seasonally-adjusted figures were roughly in line with market expectations. The headline inflation rate came in at -1.9% for the quarter, a record fall for one quarter and drastically lower than the March quarter’s +0.3%. The seasonally-adjusted inflation rate dropped by a similar amount, from a revised rate of +0.5% to -2.0%. On a 12-month basis, the headline rate registered -0.3% while the seasonally-adjusted rate registered -0.5%. In the March quarter, their respective rates were 2.2% and 2.3% after revisions.
The RBA’s preferred measure of underlying inflation, the “trimmed mean”, also went into reverse. The trimmed mean inflation rate for the June quarter was -0.1%, in line with the market’s expected figure but a sharp turnaround from March’s +0.5%. The 12-month growth rate slowed from 1.8% to 1.2%.
Long-term Commonwealth Government bond yields fell a little harder than their US counterparts had in overnight trading. By the end of the day, the 10-year yield had fallen by 5bps to 0.89% while the 20-year yield finished 6bps lower at 1.49%. The 3-year ACGB yield remained unchanged at 0.31%, 6bps above the RBA’s target yield.
In the cash futures market, expectations of a change in the actual cash rate, currently at 0.13%, continued to remain low. By the end of the day, contracts implied the cash rate would remain in a range of 0.125% to 0.135% through to the latter part of 2021.