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CEO AllenWargent Property Buyers, & WargentAdvisory (institutional). 6 x finance author.

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Sunday, 24 January 2016

Inflation: ongoing softness expected

The week ahead

Australia Day breaks up the week ahead (woop!) but there are nevertheless a few potentially absorbing snippets of news for us all to look forward to. 

These include private sector credit to be reported at the end of the week by the Reserve Bank, with a moderate increase in lending expected and a market forecast of 0.6 per cent credit growth for the month of December.

There are also the fourth quarter GDP and employment cost figures from the US due out this week.

Perhaps more interestingly, domestically we will be furnished with the consumer price index (CPI) or inflation figures for the fourth quarter of 2015, which appear likely to present something of a mixed bag.

Inflation preview

While there have been some obvious cost of living increases which will contribute to inflation in December, happily overall price pressures are expected to remain relatively benign.

The cost of holidays both at home and overseas, the ever-rising price of tobacco (should be cut from the consumer price index, huh...), and the persisently rising cost of purchasing a house will all be inflationary contributors to the consumer price index for the fourth quarter of 2015.

Although the price of automotive fuel at the bowser has not fallen anything like as sharply as the price of a barrel of crude oil, lower fuel and transport costs will likely pull down the headline inflation figure to somewhere around just 0.3 per cent for the quarter.

Incidentally, the official line for why fuel prices have not fallen as quickly as the price of crude oil is a widening of the refining spread for Singapore oil (heh).

With housing rents declining in Perth, Darwin, and Canberra, and a proliferation of investors in the market through the past calendar year, nationally rental price growth will remain subdued.

All factors considered, a headline result of around 0.3 per cent would take the annual result to a most benign 1.6 per cent for the year, which is clearly well below the bottom of the target 2 to 3 per cent range.

This would also tie in relatively closely with what has been found by the most recent TD-MI inflation gauge, which was a 0.2 increase in December for a 1.7 per cent annual gain. 

If such a result is reported on Wednesday, then this points towards ample headroom for further easing in interest rates, if this was deemed to be required through 2016. 

That said, with the outliers effectively stripped out the core inflation result could prove to be anywhere up to 0.6 per cent for the quarter, with a possible downside risk to that figure.

This would still put the underlying readings at around 2.2 per cent year-on-year, which is towards the bottom half of the target range.

Those with variable rate mortgage debt should naturally hope for a soft inflation reading when the release is due out on Wednesday.

So, stay tuned for that, and remember to have a great week!