Australian inflation lifted to a 6.1% annual pace in the June quarter on the back of further rises in fuel, grocery and home building costs. Underlying inflation also lifted reflecting broad-based price rises across the CPI basket. The RBA is set to keep hiking rates at pace over the next couple of meetings.
Consumer Price Index — Q2 | By the numbers 
- Headline CPI was 1.8% in the June quarter — below the median estimate of 1.9% and softer than in Q1 (2.1%) — as the Y/Y pace lifted from 5.1% to 6.1% (vs 6.3% exp). Seasonally adjusted CPI printed at 1.7%q/q and 6.2%Y/Y.
- The underlying CPI measures came in around consensus in the quarter and lifted sharply over the year.
- Trimmed mean posted at 1.5%q/q — in line with expectations and Q1's outcome — elevating the annual rate up to a record high at 4.9% (vs 4.7% exp) from 3.7%.
- Weighted median came in at 1.4% in the quarter (vs 1.5%), lifting to 4.2% over the year from 3%.
- CPI excluding 'volatile items' was a touch softer in Q2 at 1.6% than in Q1 (1.7%), though the annual pace elevated from 4% to 5.3%, its fastest since 2000.
Consumer Price Index — Q2 | The details
Inflation remained strong in the June quarter rising by 1.8%, though that was below market expectations and slower than Q1's 2.1% increase. Rising prices for fuel, groceries and the construction of new homes remained the major drivers of inflation in the quarter. Base effects drove the elevation in annual inflation from 5.1% to 6.1%, its fastest since the introduction of the national Goods and Services Tax in 2000.
Rising prices for fuel, groceries and the construction of new homes remained the major drivers of inflation in the quarter. These items represent just under one-quarter of the CPI basket by weight but account for around 70% of the rise in inflation over the past year.
Inflation slowed over the quarter due mainly to the impact of the federal government's 50% cut to the fuel excise tax, effective from 30 March through to 28 September. The ABS reported the maximum effect on fuel prices was in April (-13.8%) but prices subsequently rose again in May (11.1%) and June (6.8%). Overall, fuel prices increased by 4.2% in the June quarter, down substantially from the 11% surge seen in Q1 after the onset of the war in Ukraine. Over the year, fuel prices lifted by 32.1%.
Grocery price inflation, though still rising at a historically strong pace, was softer than in the March quarter. The pace of price increases slowed across several key items including: meat (0.8%q/q from 4.8% in Q1), dairy products (1.3% from 1.9%), non-alcoholic beverages (1.5% from 5.8%), non-durable household products (2.3% from 4.7%) and other products (1.1% from 2.8%).
Fruit and vegetable prices lifted by a further 5.8% in the quarter, in line with Q1's increase. Higher prices were being driven by supply disruptions associated with the east coast floods and Covid-related absences; rising input costs for fertiliser and transportation were also contributing. Bread prices were notably higher in Q2, up 3.1% from 1.8% in Q1, reflecting the constraint on global wheat supply from the war in Ukraine. Annual inflation in breads and cerals stepped up to 6.3%, its fastest since late 2008.
New home building costs recorded another strong increase of 5.6% in the quarter, rising by 20.3% through the year. Shortages of building materials and skilled labour and the unwinding of the HomeBuilder subsidy scheme have all contributed to pushing up construction costs. Over the past year, price increases across the capital cities range from 15.8% in Sydney up to 30.2% in Brisbane.
In the Covid-affected categories, international travel costs picked up sharply in the quarter (19.9%) as strong demand following the easing of border restrictions was met by limited airline capacity. Voucher schemes in New South Wales and Victoria were moderating the pace of price rises in domestic travel (1.7%) and dining out (1.4%), with those services seeing strong demand over the Easter holiday period.
Overall, Australian inflation remains heavily weighted to goods components (2.6%q/q, 8.4%Y/Y) than services categories (0.6%q/q, 3.3%Y/Y). Goods inflation is running substantially faster due largely to issues in global supply chains over the course of the pandemic and more recently accentuated by the war in Ukraine and China's return to lockdowns. The slower pace of services inflation can be linked to wage growth that is yet to reflect the strength of labour market and due to the impact of government policy decisions that have limited out-of-pocket costs. Inflation from rents also remains subdued (1.6%Y/Y), lagging the tightening in vacancy rates.
Consumer Price Index — Q2 | Insights
Today's report defied the global trend of inflation data continually surprising to the upside of expectations, with headline inflation slowing in Q2 to come in below the median estimate. That likely reduces the need for the RBA Board to hike rates by more than the 50bps discounted into market pricing ahead of the August meeting. With underlying inflation on the trimmed mean rising to 4.9% — nearly double the midpoint of the 2-3% target band — and the cash rate assessed by the RBA as sitting well below the neutral range, a fourth consecutive 50bps rise looks on the cards in September as well.
