Inflation misses again, again...

Inflation below target

Reading the inflation previews this week was jarring, with most summarising that underlying inflation would be weak (it was), but markets wouldn't care much about the release regardless (they didn't).

As expected, there was a bit of a supply shock from the drought, which brought about some food inflation via meat, milk, and fruit prices.

And there was the obligatory price increase via the 12.5 per cent tobacco excise, alongside fuel this quarter.

There were, however, negative contributions from furnishings, clothing, and more. 

Overall, the increase in tobacco, fuel, and food prices lifted the headline figure to +0.7 per cent for the quarter, and the annual result to +1.8 per cent, leading markets to see interest rates on hold in February. 

The underlying or analytical measures were yet again very weak, though.

For the wonks:

Underlying inflation slowed a little to +1.42 per cent, and hasn't been squarely in the target 2-3 per cent band since 2015.

Meanwhile, the housing group showed almost zero inflation, with rental CPI at the lowest level we've seen.

I used to write more in-depth analysis of inflation figures elsewhere, but there's no need these days since James Foster does it all for you here. 

There'll likely be an ongoing impact on food prices from bushfires into the first quarter of 2020, with apparently little prospect of the economy running much closer to its potential.

National Australia Bank and Deutsche still think interest rates will be cut in February, but others - including Bill Evans of Westpac - think there will be a pause for a few months.

There's not exactly much to fear from lower rates, given that many households are using lower mortgage rates to deleverage, and debt to income ratios are now falling.