Australia 2017 Q1 CPI: Fuel & dwellings add to seasonal boost but competitive pressures remain – Westpac

Justin Smirk, Senior Economist at Westpac, notes that the Australian Q4 CPI printed 0.5% compared to Westpac’s forecast for 0.6% and the market median was also 0.6%.

Key Quotes

“The annual rate is now 2.1%yr compare to 1.5yr in Q4, 1.3%yr in Q3 and 1.0%yr in Q2. The June quarter was the lowest rate of annual inflation since June 1999.”

“The core measures, which are seasonally adjusted and exclude extreme moves, rose 0.4% on average compared to the market’s expectation of 0.5% rise. Westpac’s forecast was also 0.5%. In the quarter, the trimmed mean gained 0.48% while the weighted median lifted 0.38%, both on the softer side of expectations 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% from 1.5%yr in Q4 and Q3.”

“The six month annualised pace of core inflation came in 1.8%yr, a modest lift from the 1.6%yr pace in Q1, making this the eighth quarter in a row the six month pace has been below the bottom of the target ban. Our current forecasts do not see the six month annualised pace of core inflation returning to the band till the March quarter 2018.”

“As always there were surprises in the quarter even from the components we have some data on but this time they were quite modest. Our forecast 0.6%qtr was based on large contribution from power bills, auto fuels and the usual seasonal bump in health care, domestic travel and education being partially offset by falling fruit & vegetables, seasonal discounting for clothing, footwear and household contents plus the steady decline in audio visual & computing prices.”

“What stood out compared to our forecasts was the stronger rise in dwelling prices (1.0%qtr vs 0.5%qtr expected) but this was the only significant upside surprise. Food prices overall fell –0.2% (0.0% expected) while household contents & services were down 1.0% (1.0% expected), health costs rose just 2.0% (2.6% expected), car prices continue to fall (–0.5% vs 0.5% expected) and a surprising 1.9% fall in holiday travel (+0.9% expected) due to an unexpected fall in domestic travel costs.”

“The March quarter continues the run of softer inflation prints as the competitive margin squeeze appears to remain in place. Dwelling costs have lifted a bit (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 release to suggest that inflation is gathering any momentum.”

“Our preliminary estimate for the core measures for Q2 2017 is 0.5%qtr/1.7%yr holding inflation below the bottom of the RBA’s target band.”