Consumer Price Index — Q3 | By the numbers
- Headline CPI increased by 0.52% in Q1 to be in line with the median forecast (prior 0.61%), while the annual pace lifted from 1.59% to 1.67%, as expected.
- Underlying inflation, based on the average of the trimmed mean and weighted median measures, increased by 0.36% in Q3 (expected: 0.4%, prior 0.41%), with the annual pace little changed at 1.40% from 1.42% (expected 1.4%).
- Trimmed mean inflation, the RBA's preferred measure, lifted by 0.38% in the September quarter (expected: 0.4%, prior revised: 0.44%), which kept the year-on-year pace unchanged at 1.55% (expected: 1.6%).
- Weighted median inflation lifted by 0.33% in Q3 (expected: 0.4%, prior 0.37%), with the annual pace softening slightly from 1.29% to 1.24% (expected: 1.3%).
Consumer Price Index — Q3 | The details
The 0.52% increase in headline CPI in the September quarter was led by the recreation and culture group (+0.23ppt), which mostly reflected a strong increase from international holiday travel and accommodation (+0.22ppt) coinciding with the peak tourist seasons in the US and Europe.
The next highest contribution came from alcohol and tobacco (+0.18ppt), with tobacco accounting for the bulk of this (+0.12ppt), with the ABS reporting that this incorporates the impact of a 12.5% rise in the federal excise tax applicable from the start of September.
Furnishings, household equipment and services contributed 0.11ppt to headline CPI, with domestic household services adding 0.05ppt on the back of a rise in childcare fees (+0.04ppt). Meanwhile, furniture and furnishings contributed 0.04ppt after a 0.02ppt addition in the previous quarter. Together with a 0.05ppt contribution from clothing and footwear (+0.06ppt in Q2), this continues to point to an upward impact on prices from the pass-through of a weaker Australian dollar.
In the housing group (+0.09ppt), weakness remains in rents (0.0ppt), while new dwelling costs fell for the third consecutive quarter (-0.01ppt) with developers maintaining purchase incentives. Household utilities added 0.04ppt, with water +0.03ppt and electricity -0.02ppt. Electricity costs fell for the third straight quarter due to changes in pricing arrangement in the eastern states. Meanwhile, property rates and charges added 0.04ppt.
Food and non-alcoholic beverages made a 0.07ppt contribution to the headline CPI figure, with increases from bread (+0.02ppt), lamb (+0.01ppt) and beef (+0.01ppt) pointing to drought-related impacts. At the same time, fruit and vegetables subtracted -0.04ppt, with the ABS reporting increased yields from berries, citrus fruits, tomatoes and broccoli placed downward pressure on prices.
A modest contribution came from insurance and financial services (+0.02ppt), while education was flat in Q3.
Subtracting from inflation in Q3 were; health (-0.01ppt) due to more consumers receiving the benefits from the PBS, transport (-0.03ppt) as automotive fuel prices weakened (-0.07ppt) after a sharp increase in Q2, and communication (-0.03ppt) reflecting cheaper telecommunication equipment and services.
In percentage terms, the chart, below, displays the price changes across the groups in Q3 and over the past year.
In a broader context, domestic inflation continues to be driven by non-tradables (goods and services where prices are determined by on-shore factors) at 1.92% compared to 1.17% for tradables (items where prices are influenced by global factors). However, taking a more near-term view, tradables at 1.18% clearly outpaced non-tradables at 0.25% Q2 and a similar theme occurred in Q3 at 0.87% for tradables and 0.41% for non-tradables. Overall, this is indicative of pass-through to prices due to Australian dollar weakness.
Consumer Price Index — Q3 | Insights
Today's report was in line with market expectations and was also consistent with the RBA's year-ended forecasts for both headline and trimmed mean inflation. Prior to these data, markets had assessed the chance of a rate cut at next week's November meeting at around a 20% chance but that has now been significantly scaled back and is in single figures. Overall, there was little new information in today's report. Inflation remains well below the RBA's target band (see chart, below) and is constrained by a labour market with considerable spare capacity, weakness in rents and new dwelling costs and also by the impact of government policy that has been directed at lowering electricity prices. Rising retail prices due to a weaker Australian dollar is an emerging theme, but the impact so far is fairly modest. Drought-related impacts are continuing to place pressure on some food costs. Soft inflation in Australia is also consistent with the trend in other major economies and is likely influenced by structural changes associated with globalisation from increased competition and technological advancements.
