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Wednesday, 26 April 2017

Core inflation misses target...again

Inflation up a bit (base effect)

Headline inflation missed expectations of a 0.6 per cent increase in rising by 0.5 per cent in the March 2017 quarter.

This was obviously some way stronger than the negative -0.2 per cent print for the prior year comparative period, and as a result the annual headline inflation rate increased to 2.1 per cent. 

It seems that the risk of deflation - if there ever was one - has passed for now, and the Reserve Bank of Australia (RBA) may at least take a little bit of comfort in the inflation rate trending higher. 

Interestingly this means that real wages 'growth' is now negative. 

The quarterly gains were largely driven by a widely anticipated 5.7 per cent increase in the price of automotive fuel, while electricity prices rose by 2.5 per cent.  

However, nearly 40 per cent of the CPI basket recorded declining prices over the quarter, including travel, fruit, and furniture prices, and inflationary pressures overall were still subdued. 

A trawl through the sub-indices shows that a range of items are at their cheapest level in around three decades, including women's clothing and household electrical items, among other categories. 

Consumer price inflation was notably higher in Sydney and Melbourne - in the middle of the target range - than in the resources capitals. 

Rates on hold

The prices of non-tradables goods were up by 2.6 per cent over the year, while tradables inflation was still very low at 1.3 per cent. 

To be fair this represents a reasonable pick-up in non-tradeables inflation, but this may well prove to be temporary. 

Underlying inflation misses again

More importantly, the annual core measures of inflation continued to miss the 2 to 3 per cent target range for the fifth consecutive quarter. 

The trimmed mean (0.48 per cent) and weighted median (0.38 per cent) readings were again very weak in the March quarter, even after the seasonal adjustments were applied. 

And despite a moderate upwards revision to the trimmed mean reading, both core measures were still well below target year-on-year at just 1.86 and 1.65 per cent respectively.

RBA credibility

Overall, despite the uptick in the headline rate of inflation, this was another soft reading for the core measures.

And as the terms of trade begin to decline again through 2017 - in turn hurting earnings and wages growth - there appears to be a good chance that core inflation continues to deviate from target on the downside for even longer than it already has.

I only read 3 or 4 media pieces on today's inflation data, and strangely all of them noted that inflation wasn't yet high enough to lead to rate hikes (to re-iterate: inflation has missed target for five quarters on the downside).

This is arguably an indictment of the RBA.

Having a stated 2 to 3 per cent inflation target can work as a stable nominal anchor, but not if people start believing that the RBA is unconcerned about undershooting the target range.

And now some are clearly doubting the Reserve Bank's commitment to meeting the inflation target, which is precisely what should not happen.

Perhaps if the Governor disagrees with the media 'hot takes' he will infer so in due course, so watch this space...

Anyway, the cash rate seems likely to be on hold for a while to come, but realistically there remains more chance of a cut this year than a hike.