As it stands | CPI
Australian inflation remained low and steady in the fourth quarter last year, though both the quarterly and annual headline CPI outcomes were stronger than anticipated at 0.7%q/q and 1.8%Y/Y. Consensus had been for the quarterly pace to lift by 0.1ppt to 0.6% and for the annual pace to remain at 1.7%.
Underlying inflation went nowhere in the December quarter; the RBA's preferred trimmed mean measure was unchanged at 0.4%q/q and 1.6%Y/Y remaining well below the lower bound of its 2-3% target band, while the weighted median was steady at 0.4%q/q and 1.3%Y/Y.
The main drivers of inflation in the December quarter were the alcohol and tobacco (+0.27ppt) and food and non-alcoholic beverage groups (+0.24ppt). Within this, tobacco added 0.31ppt to headline inflation in Q4 reflecting the annual excise tax increase and fruit contributed 0.07ppt in response to drought-related impacts on supply.
Weakness in inflation in Q4 centred on discretionary areas of spend with international travel and accommodation (part of the recreation and culture group) taking 0.12ppt off headline inflation, furnishings, household equipment and services a 0.03ppt drag and clothing and footwear weighing slightly (-0.01ppt). Communications subtracted 0.02ppt on cheaper equipment prices and the health group also declined by 0.02ppt due to the effect of the PBS reducing out-of-pocket costs for pharmaceuticals.
Headline inflation is expected to lift by 0.2% in the March quarter, while a base effect firms the annual pace from 1.8% to 2.0%. For the underlying measures, the trimmed mean is expected to print at 0.3%q/q and 1.6%Y/Y and the weighted median at 0.3%q/q and 1.4%Y/Y.
What to watch | CPI
Today's report will be of limited significance to the markets given the deflationary forces that will hit in Q2, most notably plunging petrol prices as global oil markets collapsed in response to weak demand and storage constraints, the Federal Government's decision to make childcare services free through to June 28, while a range of other assistance measures have also been announced by local governments and businesses to support households through the COVID-19 pandemic, such as some private health insurers deciding to waive premium increases. Today's report, therefore, provides a snapshot of the inflationary pulse before these factors come through. Tradables inflation (prices of goods and services that are influenced by global factors) have been lifting over recent quarters in line with weakness in the Australian dollar and this is likely to have continued into 2020 given that over the 6 months to the end of Q1 the domestic currency declined by 7.6% in trade-weighted terms and by 8.5% in US dollar terms. The impact of drought conditions driving up vegetable and meat prices have been another factor here. The main driver of inflation over recent years has come from the non-tradables sector (prices determined by domestic factors), which reflects price increases in 'administered' areas such as utilities, health services, childcare, property rates and charges and public transport fares etc, and this is likely to have remained the case in Q1.
