Australian's inflation report for the June quarter is scheduled to be released by the ABS today at 11:30am (AEST). Similar to what has been seen around the world, Australian inflation is expected to accelerate due largely to statistical base effects with prices in reopened economies being compared against the depths of the pandemic when lockdowns were in place. Capacity constraints have accentuated price rises in many economies as they reopened, though these pressures appear to have been less prevalent in Australia due to shorter lockdowns and a less severe hit to the economy as a result. But the reversal of government policy decisions to support households through the lockdowns is expected to drive annual Australian CPI to its highest in many years in Q2.
As it stands | CPI
In the March quarter, Australian inflation was weaker than expected with headline CPI printing at 0.6%q/q (vs 0.9% forecast). Annual CPI lifted from 0.9% to 1.1% but was below the 1.4% pace anticipated.
Measures of underlying inflation also surprised to the downside of estimates. The trimmed mean was 0.35%q/q (vs 0.6% expected), with the annual pace easing from 1.2% to a record low of 1.1%, while the weighted median printed at 0.4%q/q, maintaining a 1.3%Y/Y pace.
Sources of inflation were narrowly based in the March quarter, with automotive fuel contributing 0.33ppt to the 0.6% lift in headline CPI. Fuel prices increased by 8.7% in the quarter but were still below pre-pandemic levels, down by 3.6% on a year earlier. Outside of this, the health group added 0.15ppt to quarterly CPI, reflecting the annual reset for accessing subsidies under the Medicare Safety Net and PBS, while food and non-alcoholic beverages contributed 0.07ppt to CPI in Q1 driven by higher prices for meat and takeaway food.
Weighing on the CPI was the impact of the Federal Government's HomeBuilder grants, which are treated as a subsidy and thereby lower new dwelling prices. This restricted the housing group to just a 0.1% rise in Q1 (0.02ppt), with the price of new dwellings recorded as falling by 0.1%. However, if the impact of the HomeBuilder grants was excluded, the ABS reported that new dwelling prices rose by 1.9% in the quarter, due to rising labour and materials costs. Meanwhile, rents nationally were held flat in Q1 as declines in Sydney (-0.3%), Perth (-0.1%) and Darwin (-1.5%) offset rises in the other capital city markets.
Cost saving measures introduced by governments to support households continued to weigh on utilities prices, falling by a further 0.2% in Q1 to be down by 7.4% over the year. Utilities fell by 0.9% in Melbourne reflecting a reduction in market and standing offers as well as rebates for some customers. In addition, other cost savings for households were also evident with education costs falling over the past year as a result of many schools implementing fee freezes. For tertiary education, a 1.7% fall in prices in Q1 was driven by the Federal Government's Job-ready Graduate Package.
Market expectations | CPI
Headline CPI is forecast to rise by 0.7% in Q2 on the median estimate between a range of forecasts from 0.4% to 0.9%. Annual CPI is expected to accelerate significantly from 1.1% to 3.8% driven by base effects due to prices in a strong and reopening economy being compared back to the depths of the pandemic 12 months ago when fuel prices had plunged lower, the Federal Government was providing all families with free childcare, state governments had provided relief to households through rent reduction mechanisms and rebates, and many retailers were cutting prices to drive sales before the lockdowns came in. Trimmed mean inflation is forecast to lift by 0.5% in Q2, with the annual pace expected to firm from 1.1% to 1.6%.
What to watch | CPI
The combination of base effects and the ongoing influences from the HomeBuilder grants and weakness in administered prices means that the headline inflation measure will contain many distortions. Thus the focus should turn to the underlying measures for a better read on the true inflationary pulse in the economy. Another area of interest is the mix between goods-related and services inflation. The former has been the driving influence over the pandemic period reflecting shifts in consumption patterns, but historically the impulse from the 'stickier' services side has been key to inflation trends.
