Australia's Consumer Price Index (CPI) was stronger than forecast in the December quarter at 0.9%, though this was more reflective of policy-related effects associated with the pandemic rather than underlying macro conditions. Annual CPI remains weak at 0.9% and the record low on the RBA's preferred trimmed mean measure of 1.19% held in Q4.
Consumer Price Index — Q4 | By the numbers- Headline CPI (not seasonally adjusted) came in above the median estimate in the December quarter rising by 0.86% against 0.7% expected and after Q3's rebound of 1.57%. Seasonally adjusted CPI printed at 0.77%q/q and 0.86%Y/Y (prior: 1.4%q/q, 0.69%Y/Y).
- Details for the underlying measures (measures are seasonally adjusted);
- Trimmed mean lifted 0.42%q/q (expected: 0.4%, prior rev: 0.31% from 0.41%), holding the annual pace at 1.19%.
- Weighted median increased by 0.48%q/q from 0.25% (revised from 0.33%); the year over year pace firming to 1.36% from 1.23%.
Consumer Price Index — Q4 | The details
Inflation according to the CPI in the December quarter at 0.86% was a little stronger than the 0.7% pace that was anticipated by the markets; however, the breath of inflationary pressures remains narrow and are mainly the result of policy effects. Annual inflation of 0.86% on a headline basis and 1.19% on the RBA's preferred trimmed mean measure—well short of the central bank's 2-3% target range—remain consistent with an economy still very much in recovery mode from the pandemic shock. As a macro theme, the pandemic has weighed on services inflation (0.09%Y/Y) due to the impact of restrictions on activity, but goods inflation has been rising (3.39%) reflecting shifts in consumption patterns with spending in various areas (such as travel) being substituted for demand elsewhere (such as household goods and vehicles).
One other point worth highlighting is that non-tradables inflation (1.54%Y/Y) is rising at the same time as tradables inflation fell back (-0.57%Y/Y), which is broadly reflective of conditions normalising in Australia at the same time as the disruptions from the pandemic were intensifying again offshore.
Going across the baskets, the strongest contribution to inflation in Q4 came from alcohol and tobacco with the group rising 4.18%q/q (9.27%Y/Y) adding 0.43ppt to the CPI. This reflected the effects of annual excise tax increases in tobacco prices that applied from September 1. Furnishings, household equipment and services made the next strongest contribution to the quarterly CPI (0.35ppt) with prices up 3.44%q/q (3.63%Y/Y), though this was driven entirely by the winding up of free child care services which was one of the Federal government's pandemic response measures.
Victoria's reopening led to out-of-pocket costs for child care returning with those services rising 37.7% in Q4. Note that there is also a crossover here into the education group (1.17%q/q) as it includes outside school hours care services (5.38%q/q) that were also covered by the free child care policy. The ABS advises that the furnishings, household equipment and services group would have fallen by 0.7% in Q4 if the impact of the return of child care costs was excluded, due to weakness in non-durable goods (-1.9%q/q), personal care products (-1.8%q/q) and furniture (-1.1%q/q). Meanwhile, the recreation and culture group lifted by 1.59%q/q (0.0%Y/Y) adding 0.16ppt to Q4 CPI. The driver was the return of domestic travel and accommodation (6.26%q/q) enabled by the reopening of state borders.
Transport costs were up 0.88%q/q (-4.6%Y/Y) adding 0.11ppt to Q4 CPI. This reflected higher public transport costs (4.5%q/q) after a period of discounting in Sydney came to an end, while new vehicle prices advanced (1.8%q/q) on strong demand. Petrol prices were contained in Q4 rising by 0.45%. The health group contributed 0.09ppt to Q4 CPI through a 1.3% price rise. This reflected the freeze on private health insurance premium increases ceasing and as a result, medical and hospital services costs lifted by 2.5%.
Food and non-alcoholic beverages lifted by a modest 0.18% in Q4 (0.05ppt) around varying influences. The reopening in Victoria drove a 1.21% rise in restaurant prices, while supply-side factors resulted in higher fruit (3.38%) and beef prices (2.97%). However, these increases were moderated by a 5.97% fall in vegetable prices.
The major weight on inflation in Q4 came from housing with the group falling 0.58%q/q (-0.9%Y/Y) for an overall contribution of -0.17ppt. As highlighted in our preview, the ABS had already advised that the group would be affected by a state government initiative in Western Australia in the form of $600 rebates on electricity prices. This resulted in electricity prices nationally slumping by 7.53%q/q (-9.22%Y/Y) reflecting a 66.7% fall in Perth due to the rebate. Moreover, the Federal government's HomeBuilder scheme together with additional incentives on offer in Western Australia and Tasmania restricted new dwelling costs to a 0.7% rise in Q4, which the ABS said in their absence would have lifted by 1.3%. After two consecutive quarterly falls, rents lifted in Q4 by a modest 0.09% (-1.33%Y/Y). The clothing and footwear group subtracted from Q4 CPI (-0.04ppt) with prices falling 1.05%q/q (-1.26%Y/Y) reflecting the effect of discounting associated with Black Friday sales. Communications were a modest weight on prices in Q4 (-0.02ppt) as equipment and service costs remained under pressure.
Consumer Price Index — Q4 | Insights
Inflationary pressures in the Australian economy remain narrowly based and continue to mainly reflect the impact of policy responses to the onset of the pandemic. While the recovery is well underway, and largely progressing well, spare capacity is still elevated and hence inflation is well short of the RBA's 2-3% target. If anything, given the RBA's stated focus on actual rather than forecast inflation, as well as a labour market that is a long way from what could be considered at levels of full employment, expect the Board to reiterate the need for its accommodative policy settings to be maintained at its upcoming February meeting.