Summary: Annual Inflation rate hits 3.7% in June quarter, just above market expectations; RBA preferred measure rises to 1.6%, in line with expected figure; transport costs (fuel) main driver of result.
In the early 1990s, high rates of inflation in Australia were reined in by the “recession we had to have” as it became known. Since then, underlying consumer price inflation has averaged around 2.4%, a little below the midpoint of the RBA’s target range. 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 June quarter have now been released by the ABS and the seasonally-adjusted inflation rate posted a 0.8% rise. The increase was just above the generally expected figure of 0.7% and higher than March’s comparable figure of 0.6%. On a 12-month basis, the seasonally-adjusted rate increased from 0.9% after revisions in March to 3.7%, with the 1.9% fall in the June 2020 quarter providing a significantly lower base for calculations.
The RBA’s preferred measure of underlying inflation, the “trimmed mean”, increased by 0.5% over the quarter, in line with market expectations and slightly higher than the March quarter’s 0.4%. The 12-month growth rate rose from 1.1% to 1.6%.
Commonwealth Government bond yields fell on the day, outpacing movements of their US Treasury counterparts overnight. By the close of business, the 3-year ACGB yield had lost 2bps to 0.28% while10-year and 20-year ACGB yield had each shed 6bps to 1.15% and 1.78% respectively.
In the cash futures market, expectations of a change in the actual cash rate, currently at 0.03%, remained largely unchanged. At the end of the day, contract prices implied the cash rate would inch up to around 0.21% by November 2022.
The main driver of the headline inflation figure in the quarter was a 2.8% rise in transport prices, contributing 0.3 percentage points of the 0.8% (unadjusted) increase over the quarter. The Food, Housing, Furnishings and Health segments all had roughly the same influence on the quarter; each contributed around 0.1% percentage points to the quarterly total, increasing 0.5%, 0.3%, 1.1%, 1.5% and 2.8% respectively.
Here’s what a few economists thought about the figures:
Chris Read, Morgan Stanley Australia
This print comes in a touch stronger than what the RBA was forecasting in May. However we don’t think it is meaningful enough for them to significantly shift either their forecasts or policy outlook. Changes at their August meeting will be much more impacted by the lockdown in New South Wales; we expect meaningful near-term downgrades to activity forecasts but relatively small shifts in the inflation outlook, particularly over the medium-term. We expect the RBA will announce a delay of their planned QE taper with a review in November but, with inflation expected to continue to build over 2022, we still see rate hikes as likely starting 2Q23.
Justin Smirk, Westpac
The June quarter CPI was still under the push/pull influence of changing government support, subsidies and grants. But as these grants expire or fade from use, prices will drift up towards underlying prices unless softer demand leads to increased discounting. As such, while there may be a bit of fine turning of our forecast inflation profile as we update for the latest data, it will not be enough to change are overall view that the current surge in annual inflation is set to fade as we move into 2022 at somewhere around 2%, the bottom of the RBA’s inflation target band.
Hayden Dimes, ANZ
Headline Q2 inflation lifted to a very strong 0.8%, which saw annual headline inflation surge above the RBA’s target band for the first time in a decade. This move is expected to be temporary though and inflation will soon start to slow over the coming quarters. Fuel was once again a significant contributor to the headline number, as was electricity. The trimmed mean inflation also lifted, though to a more subdued 0.5%. Still, with the annual figure some way below 2%, the underlying message is that inflation is still a long way from where the RBA wants it to be. We expect trimmed mean inflation to return to the target band in H2 2022 and rise from there, triggering cash rate hikes in H2 2023.