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Wednesday, 25 January 2017

Inflation under target again

Inflation subdued (except vegetables)

Very few signs of inflationary pressures, then, with year-on-year declines in the prices of clothing and footwear, transport, communication, and recreation and culture. 

In the December 2016 quarter there was a jump in the price of tobacco (more excise) and automotive fuel, leading to a headline inflation result of 0.5 per cent. 

The only other noticeable price increases have been for vegetables, which jumped by 12.5 per cent over the year, with a lack of supply particularly impacting the price of potatoes, capsicums, broccoli, and cauliflower. 

The annual figure for headline inflation ticked up a little to 1.5 per cent, but remains well below the target range of 2 to 3 per cent.


Core blimey

The more closely watched core inflation figures (known as the 'trimmed mean' and the 'weighted median') also implied a pace of inflation below the target range, if only just, though to one decimal place both measures were rounded down to 0.4 per cent. 

Year-on-year both core measures were very soft at just 1.6 per cent and 1.5 per cent respectively.


If you were looking for signs that the low point for inflation is now in the rear view mirror, the increase in non-tradables inflation - a proxy for domestic prices pressures - to 2.1 per cent would add weight to your argument. 



Interest rates

The figures received a mixed response, particularly with regards to the outlook for interest rates.

It certainly seems odd that folks are talking about interest rate hikes with annual inflation remaining so far under the target range.

If the prices of iron ore and coal start to fall again in 2017, which seems more than likely, then there might yet be further rate cuts to come. 

Futures markets take the balanced view that the cash rate is likely staying right where it is for 2017 in its entirety.