Australian inflation data for the March quarter is due to be released by the ABS at 11:30am (AEST) today. Headline inflation rebounded over the second half of 2020 in line with the reopening, though the annual rate at 0.9% was sharply lower than year earlier, due largely to the impact of government policy decisions around free child care services and other cost-saving initiatives such as rebates for utilities. Inflation is now rising with these effects unwinding while other transitory factors are also contributing as activity in the economy continues to recover.
As it stands | CPI
Headline CPI was stronger than expected in the December quarter rising by 0.9%, leaving the pace through the year a little firmer at 0.9% from 0.7% previously. Measures of underlying inflation were more subdued and in line with consensus forecasts; trimmed mean 0.4%q/q and 1.2%Y/Y and weighted median 0.5%q/q and 1.5%Y/Y. (full review here)
The main influences on inflation in the quarter were the reversal of free care services as well as the annual tax excise increase on tobacco. Contributing around 0.4ppt to quarterly inflation was the return of out-of-pocket costs for child care services (including outside school hours care) as the state of Victoria reopened from lockdown. On the other hand, government policy decisions in other areas weighed on inflation in the quarter, most notably through rebates for household utilities in Western Australia.
New dwelling costs lifted by 0.7% in the quarter on the back of strengthening demand in response to low rates and government incentives. In response, developers increased base prices for new homes and offered fewer discounts, partially offsetting the downward impact on prices from the $25k HomeBuilder grants. Rents stabilised in Q4 after falling in each of the two previous quarters and were 1.3% lower than a year earlier, reflecting the impact of reduced demand due to the border closures and rent reduction mechanisms.
Market expectations | CPI
The consensus forecast on headline inflation for the March quarter is 0.9%, with the range of estimates between 0.6% to 1.0%. Annual CPI is expected to rise from 0.9% to 1.4% (range: 1.3% to 1.7%). Consensus on trimmed mean inflation is for a quarterly rate of 0.6%, lifting the annual pace to 1.4% from 1.2%.
What to watch | CPI
A number of pandemic-related influences will continue to affect the March quarter inflation data. The strength in the housing market, driven by stimulatory policy, will likely see new dwelling costs rise further, though price rises will be muted in other areas, such as household utilities, due to government rebates. The sizeable shift towards good-related consumption away from services at the onset of the pandemic appears to be rebalancing now on a wider reopening and fewer restrictions and will be an area to watch. For now, annual inflation should remain contained ahead of a surge higher next quarter to north of 3% on base effects as the impact of cost-saving policy measures to support households roll out of the calculation. However, underlying inflation is likely to remain at a subdued pace with the economy still recovering from the pandemic shock.
