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Wednesday, 28 January 2015

Inflation a mixed bag

Inflation

A very interesting inflation release today, then!

The headline inflation figure of 0.2 percent for the quarter was very soft, taking the December 2013 to December 2014 reading down to only 1.7 percent, below the bottom end of the target range.


As expected, the plummeting oil price played a key role in that.
  • The most significant price rises this quarter were for domestic holiday travel and accommodation (+5.8%), tobacco (+4.8%) and new dwelling purchase by owner-occupiers (+1.1%).
  • The most significant offsetting price falls this quarter were for automotive fuel (-6.8%), audio, visual and computing equipment (-5.2%) and audio, visual and computing media and services (-3.8%).
Despite this very soft headline print, the figures reported for the less volatile and preferred trimmed mean/weighted median for the December quarter came in stronger than expected at 0.7 and 0.7 respectively.


With downward revisions to earlier quarter figures the annualised underlying figures for these two key underlying measures came in at 2.2 percent and 2.3 percent respectively.

These readings are obviously at the lower end of the 2 to 3 percent range but the twin 0.7 prints for the quarter might just be enough to keep interest rates on hold in February. 

Rents grow at 2.4 percent

An interesting data series hidden within the inflation data is to be found in the sub-indices for rents.

Rental growth seems to have stabilised nationally at 2.4 percent growth over the past year.


However this 2.4 percent reading masks significant variations in fortunes by capital city.

Rental growth remains robust in Sydney (+3.0 percent), Melbourne (+2.4 percent) and Brisbane (+2.0 percent).

Rental growth is, however, softer in Adelaide (+1.7 percent) and falling sharply in Perth (+1.5 percent).


In the smaller capital cities rental growth is also looking very soft.

The rate of rental growth continues to nosedive in Darwin (still +2.7 percent, but down from above +8 percent in 2013), remains soft in Hobart (+1.0 percent) and has turned sharply negative in Canberra (-1.8 percent and still declining).


It is probably worth noting here that despite rental growth being "softer" than it has been, in nominal terms - which is what matters to property investors who own property - the rental index continues to climb to record highs by the quarter.


The wrap

A bit of a mixed bag here for the inflation figures, then, and a data series which might easily be interpreted either way.

A very soft headline inflation reading of 1.7 percent suggests that the next move in interest rates is still likely to be down, particularly given that we have weak GDP growth, uncertain business confidence and low wages growth (hardly a recipe for persistent inflation, one would have thought!).

But trimmed mean and weighted median readings of 0.7 percent in the quarter will probably convince the Reserve Bank to keep interest rates on hold in February.

Nevertheless, annualised core inflation of 2.25 percent seems unlikely to preclude another interest rate cut should one be deemed necessary.

Currency markets weren't entirely convinced about how to interpret the figures either, with the Australian dollar first shooting up and then dribbling back down a bit, then stabilising around 79.9 cents.

Tough to call.

If I was a betting man I'd take a punt on a cut in the official cash rate in March to 2.25 percent.

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My view of beautiful Brisbane...aka. the "Paris of Asia" (h/t Dan Petrie of Bloomberg).