Australia: Headline inflation back into the band - Westpac

Justin Smirk, Senior Economist at Westpac, notes that the Australia’s Q1 CPI printed 0.5% compared to market and Westpac expectations for 0.6% while the annual rate lifted to 2.1%yr up from 1.5yr in Q4 continuing the acceleration from 1.3%yr in Q3 and 1.0%yr in Q2.

Key Quotes

“The June quarter was the lowest rate of annual inflation since June 1999.”

“Overall the March quarter continued the run of softer inflation prints as the competitive margin squeeze appears to remain in place. Dwelling costs have lifted a bit (although we don’t know if that is due to the inclusion of attached dwellings prices) and rising power bills are coming through but rent inflation remains very modest. So even with inflationary expectations drifting back towards the long–run average (we suspect fuel and power bills are responsible for this) there is little in this update to suggest that inflation is gathering any momentum.”

“Looking into the details the core measures, which are seasonally adjusted and exclude extreme moves, rose 0.4% on average compared to the market’s expectation of a 0.5% rise. In the quarter, the trimmed mean gained 0.48% while the weighted median lifted 0.38% highlighting just how modest the broader inflation picture is outside a few isolated sectors. The annual pace of the average of the core measures is now 1.8%yr, up from 1.5%yr in Q4 and Q3.”

“Our preliminary estimate for the core measures for Q2 2017 is 0.5%qtr/1.8%yr holding inflation below the bottom of the RBA’s target band. On our current forecasts, which incorporates a modest lift in dwelling price inflation and a significant bump up in electricity bills inflation through the next two years, the six month annualised pace of core inflation does not return to the band till the March quarter 2018.”