As it stands | CPI
Australia's inflationary pulse was a little stronger than expected in the March quarter with the headline CPI rising by 0.3% (forecast 0.2%) lifting the annual pace from 1.8% to 2.2% — its fastest in 5½ years. This was driven by higher food prices with vegetable (9.1%qtr) and fruit prices (2.4%qtr) up strongly due to supply-side disruptions associated with the earlier drought and summer bushfires and by stockpiling of essential items such as non-durable household products (2.8%qtr) and pharmaceuticals (5.1%qtr) ahead of COVID-19 shutdowns. The RBA's preferred trimmed mean measure also outperformed consensus advancing by 0.5% in Q1 to be up by 1.8% through the year but was still well below the lower band of its 2-3% target. For a full review of Q1's data see here.
The consensus expectation is that headline CPI will post its largest quarterly contraction on record of -2.0% in Q2 between a range of estimates from -2.4% to 0.1%. The annual pace is forecast to swing from 2.2% to -0.5%. A negative outcome is also anticipated on the trimmed mean of -0.1%q/q, slowing the year-on-year pace from 1.7% to 1.4%.
What to watch | CPIToday's report will provide an overview of how the COVID-19 pandemic affected price levels in the Australian economy. There are several key dynamics we know already. Firstly, the Australian Government's decision to make childcare services free between early April and mid-July will have a significant deflationary impact with the ABS advising this will subtract in the order of 1.1ppts from headline CPI in the June quarter (see chart, below). Secondly, petrol prices were down sharply in the quarter as the shutdown in Australia and those occurring across other countries saw global demand for oil greatly reduce, which will also take around 1ppt off the headline inflation number. Thirdly, state government initiatives were implemented to assist tenants in the rental market, including mechanisms to negotiate rent reductions with their landlord in the event they had lost work or income, and this will be reflected as a price fall in the CPI. Travel restrictions also prompted some landlords to convert their premises from holiday accommodation to longer-term accommodation, adding to the supply of stock on the rental market. Lastly, assistance was provided to households through various state government initiatives to either freeze prices or enhance rebates on certain charges such as utilities, while many private health insurers in April deferred scheduled premium increases for at least 6 months. There may be some price rises that come through, particularly in food and other essentials that were in strong demand in the lead up to and in the early stages of the shutdown as inventories were run down quickly and supply chains were stretched in trying to keep up, but the impact of the pandemic was net deflationary in Q2.
Source: ABS
There are also some technical details worth highlighting. Given that the pandemic resulted in a range of goods and services being unavailable due to restrictions or closures (international and domestic travel, urban transport services and sporting events etc), the ABS has had to impute price changes for these items as it outlines in this explanatory note. The other point to highlight is that the CPI is based on a 'fixed basket' methodology and thus it will not be representative of the significant shifts in purchasing patterns that we already know have occurred, such as increased demand for essential items (including basic food) and household goods (home office furniture etc) and discretionary expenditure falling away sharply in areas such as travel and dining out.