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Wednesday, 22 July 2015

Inflationary pressures remain soft

CPI undershoot

The ABS released its Consumer Price Index (CPI) figures for the June 2015 quarter.

The headline result was softer than expected by the market at 0.7 per cent for the quarter, to be up by just 1.5 per cent over the year.

As had been anticipated by the market, a major driver of inflation in this quarter was the rebound in auto fuel costs following on from a record decline in the year to March.

The headline inflation result of 1.5 per cent remains well below the 2 to 3 per cent target band, which in turn will likely result in speculation over further interest rate cuts.

The more important underlying figures which effectively strip out the effect of outlying readings showed the trimmed mean reading to be up by 0.56 per cent for the quarter and just 2.19 per cent for the year in seasonally adjusted terms.

The weighted median result for the quarter was just 0.5 per cent, although up by 2.4 per cent for the year.

The wrap

Despite the dollar having declined substantially over recent times, inflationary pressures are not much in evidence, although the forward-looking Reserve Bank will be more interested in the period ahead than what has gone before.

Wage price pressures have been very muted of late, consistent with a fair level of spare capacity in the labour market.

Futures markets have been pricing a further interest rate cut in this cycle over the next 12 months as more likely than not.

In a speech in Sydney today the Reserve Bank Governor Glenn Stevens suggested that further easing of interest rates is still on the table, although he also hinted that such an approach would also bring its own risks to financial stability.

Stevens was quick to highlight that the latest data shows that households have some $90 billion socked into mortgage offsets, suggesting that after accounting for such deposits credit "growth" is somewhat lower than published. 

But that in itself might imply that household spending is likely to be lower than expected, which may hamper the rebalancing of the economy.

All in all it rather sounds like a central bank which is in "wait and see" mode for the time being with regards to interest rate policy.