Independent Australian and global macro analysis

Tuesday, April 23, 2019

Australian inflation slows sharply: CPI stalls in Q1

Australian inflation slowed more sharply than expected in Q1, with the headline Consumer Price Index (CPI) measure stalling in the quarter, as the annual rate fell back to 2016 levels. Annual core inflation also fell to a 2½-year low sliding further away from the Reserve Bank of Australia's 2% lower target to open the door for a rate cut, particularly if the unemployment rate shows any sign of deterioration. 

Consumer Price Index — Q1 | By the numbers 
  • Headline inflation stalled in Q1 (0.0%) in a downside surprise to the market forecast for 0.2% (prior 0.5%).
  • The annual rate decelerated to 1.3% from 1.8%, missing the expected outcome for 1.5%.

  • Core inflation (average of the trimmed mean and weighted median measures) was just 0.19% in Q1, which was less than half of what the market had expected at 0.4% (prior revised: 0.42%)
  • Annual core inflation slowed to 1.42% to come in well short of the 1.65% expected (prior revised: 1.73%)
  • Separating the core inflation numbers, the trimmed mean measure printed at 0.28%q/q (expected: 0.4%, prior revised: 0.47%) and 1.6%Y/Y (exp 1.7%, prior rev 1.82%). Meanwhile, the weighted median slowed to 0.1%q/q (exp 0.4%, prior rev 0.36%) and 1.24%Y/Y (exp 1.6%, prior rev 1.64%)   

Consumer Price Index — Q1 | The details  

The details from today's report confirm that the stalling in headline CPI in the quarter was driven by weakness across a broad range of areas, as per the chart, below (click to expand). The transport category subtracted 0.21ppt from the CPI figure in Q1, though that understates the impact of an 8.7% fall in petrol prices (-0.31ppt). 

Intense competition continues to weigh on prices in the retail sector, highlighted by clothing and footwear (-0.05ppt) and furniture and furnishings (-0.03ppt). Domestic household services added 0.04ppt to inflation in the quarter.

The housing category was broadly flat in Q1 (+0.01ppt) as rents stalled and new construction declined (-0.02ppt) in line with the correction occurring in the property market. 

By group, the largest subtraction came from recreation and culture (-0.22ppt), mostly attributable to holiday travel both domestically (-0.13ppt) and internationally (-0.08ppt). Also notable was weakness from audiovisual and computing equipment (-0.04ppt).  

At the other end of the scale, the impact of drought conditions resulted in a sharp increase from vegetable prices (+0.11ppt). However, the main inflationary pressures remain in the 'administered' areas — those impacted by government policy — in education (+0.14ppt), health (+0.12ppt) and alcohol and tobacco (+0.03ppt).     

Looking at the above analysis from a different perspective, the chart, below, provides the percentage changes in price for each of the groups for the quarter and the year. From this, we can see that education costs lifted by 2.7% in the quarter to outpace all other groups. Next highest was health at 1.9%, due to cyclical factors relating to government subsidies. Food prices lifted by 1.5%, as vegetable (+7.7%) and fruit prices (+1.8%) responded to supply constraints brought about by drought conditions.  

Costs in the housing group stalled in the quarter, reflected by no change in rents and new dwelling prices fell by 0.2%. Meanwhile, electricity prices fell by 0.6% in the quarter.   

As mentioned earlier, fuel prices fell by 8.7% in the quarter. There was a similar magnitude of prices declines for clothing and footwear (-1.4%) and recreation and culture (-1.5%).  

Looking more broadly, the disinflationary impact from tradables (prices determined by global factors) intensified with a 0.6% decline in the quarter after falling by 0.3% in Q4, with annual growth slowing from 0.6% to 0.4%. Non-tradables (reflecting domestic factors) lifted by 0.3% in Q1, though annual growth decelerated to 1.8% from 2.4% 

Inflation for market goods and services ex-volatile items  effectively a proxy for private sector price pressures  fell by 0.1% in the quarter, which slowed the annual pace to 1.4% from 1.5%. However, it is interesting to note that it now outpaces annual growth in headline CPI at 1.3%. The last time this occurred was Q2 2016, though that is more likely to be explained by the sizeable fall in petrol prices rather than indicating a shift in the underlying balance of inflationary pressures with 'administered' or government-influenced prices.  

Consumer Price Index — Q1 | Insights

The RBA's April minutes made it clear that the hurdle to a rate cut was dependent on the unemployment rate trending up and the trajectory of inflation not moving any higher. Today's sharp slowing in core inflation meets the second part of that scenario. In February, the RBA in February had forecast core inflation on the trimmed mean measure to reach 1.75% by mid-year. With inflation slowing more sharply than expected and moving further away from the target band, we can expect to see next month's updated forecasts for inflation downgraded in addition to revisions for GDP growth. For now, labour market conditions look to remain robust and appear to be the only factor standing in the way of a near-term rate cut.