Australia's Consumer Price Index (CPI) data came in softer than anticipated in the June quarter (Q2), with little sign of a shift in the inflationary environment.
CPI — Q2 | By the numbers
- Headline inflation in Q2 printed at +0.4% and +2.1%Y/Y, which was below the median market forecasts for +0.5%q/q and +2.2%Y/Y (prior +0.5%q/q and +1.9%Y/Y)
- Core inflation (trimmed mean and weighted median seasonally measures) was essentially as expected averaging +0.46%q/q and +1.87%Y/Y (exp: +0.5%q/q and +1.9%Y/Y)
For headline inflation, this made it 7 consecutive quarters where the quarterly figure was below the expected outcome.
Of more relevance from an RBA policy perspective, core inflation slowed in today’s data to +1.87%Y/Y from an upwardly revised pace of +2.01%Y/Y in Q1. This sits a touch below the RBA's forecast (+2.0%Y/Y) published in May's Statement on Monetary Policy, which also show that a lift in core inflation is not seen until mid-2020 (+2.25%Y/Y).
CPI — Q2 | The details
The main contribution to inflation in Q2 came from a strong rise in petrol prices (+6.9%), which added +0.24ppt to the quarterly figure.
Next most was Health, due mainly to the annual increase in premiums for private health insurance (+3.1%). Alcohol and tobacco prices lifted 1.6% in Q2, with tobacco adding +0.09ppt to inflation and alcohol +0.03ppt.
The Housing group added a soft +0.03ppt to inflation, with rises for new dwellings (+0.8%) and maintenance (+0.4%). Rents and rates and charges were flat (0.0%), while Utilities fell (-1.2%) on weaker power prices.
Food and non-alcoholic beverages prices were down -0.4% on the quarter (+0.3Y/Y), which reflected falls for vegetables (-2.9%) and fruit (-2.5%).
Highlighting the intensity of retail competition, prices over the past year fell for appliances -3.1%Y/Y, clothing -3.0%Y/Y, footwear -3.0%Y/Y, furniture -2.7% and vehicles -2.2%Y/Y.
Looking more broadly, inflation of tradables — from imported sources (accounting for around 35% of the CPI figure) — lifted +0.5% in Q2 but is little changed over the year (+0.3%). This has provided some offset to non-tradables inflation — influenced by domestic factors — although, this softened in Q2 to +0.3 and +3.0%Y/Y.
Separating the impact of areas which are impacted by government policy — from price increases in alcohol, tobacco and private health insurance premiums, the underlying inflationary environment remains muted.
Inflation for ‘market goods and services ex-volatile items’ — a guide to private sector inflation influenced by demand and supply factors — increased just +0.2% in Q2, and is +1.1%Y/Y in a result that is unchanged from the previous two quarters.
Overall, Australia's inflationary pulse remains soft with core inflation back below the RBA's lower target. There was little in Q2's data to indicate that core inflation is set to firm notably over the near-term. Stronger wages growth likely remains the key link, and markets will be looking ahead to the release of the Wage Price Index for Q2 (15/8), which will need to show a sustained strengthening over the quarters ahead to help lift core inflation up into the target range. Cash rate futures are not fully priced for a rate increase for at least the next 18 months.
