Summary: Inflation rate higher than expected in December quarter; RBA preferred measure in line with market expectations; tobacco tax increases main driver of result, childcare costs also features again; economists focus on subdued underlying result.
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 2.3%, a little below 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 for the December quarter have now been released by the ABS and both the headline and seasonally-adjusted figures were higher than the 0.7% expected. The headline inflation rate came in at 0.9% for the quarter, less than the September quarter’s 1.6%. The seasonally-adjusted inflation rate also slowed in comparison to the previous quarter, from a revised rate of 1.4% to 0.8%. On a 12-month basis, the headline rate registered +0.9%, as did the seasonally-adjusted rate. In the September quarter, their respective rates were both 0.7% after revisions.
The RBA’s preferred measure of underlying inflation, the “trimmed mean”, was pretty much as expected. The trimmed mean inflation rate for the December quarter was +0.4%, in line with the market’s expected figure and slightly higher than the September quarter’s 0.3%. The 12-month growth rate remained unchanged at 1.2%.
Longer-term Commonwealth Government bond yields moved inconsistently on the day. By the end of the day, the 10-year ACGB yield had gained 3bps to 1.10% while the 20-year yield lost 3bps to 1.82%. The 3-year yield remained unchanged at 0.18%.
In the cash futures market, expectations of a change in the actual cash rate, currently at 0.03%, remained fairly stable. At the end of the day, contract prices implied the cash rate would inch up slowly to around 0.06% by mid-2022.
The main driver of the headline inflation figure in the quarter was a 4.2% rise in alcohol and tobacco prices, contributing 0.4% of the 0.9% increase over the quarter. The Furnishings, household equipment and services segment had the next largest influence on the quarter; it increased by 3.4% and contributed 0.3% to the quarterly total. This segment includes childcare, which accounted for much of the segments increase.