Australian Q3 CPI: Core stability in doubt - ANZ
According to Jo Masters Senior Economist at ANZ, the Q3 inflation print of Australia was a touch weaker than expected, although the boost from higher electricity and gas prices came through as we thought.
Key Quotes
“The core measures, together with the ANZ Diffusion Index, suggest that price pressures remain muted across a broad range of items. Retail competition and the stronger AUD clearly impacted. From a policy perspective, our expectation of two rate hikes in 2018 was not driven by an expected acceleration in inflation, although a stabilisation in inflation close to the policy band seems a necessary precondition. These data leave a question-mark about whether that has been achieved, though we are leaving our RBA call unchanged at this point. Given other dynamics, faster wage growth is critical to the inflation outlook.”
“Q3 CPI rose by 0.6% q/q, which saw the annual rate decelerate a touch to 1.8% y/y from 1.9% the previous quarter. As expected headline inflation was boosted by electricity (up 8.9% q/q) and gas (up 5.2% q/q), which saw utilities contribute 0.3 ppt to the headline figure. Seasonal rises for tobacco and international airfares also impacted.”
“Another factor likely weighing on retail prices was the stronger AUD. Tradable inflation fell 0.3% q/q and 0.9% y/y. In contrast, non-tradables inflation was up 1% q/q. That said, electricity and gas would have boosted the non-tradables outcome, and we note that CPI, excluding housing and financial & insurance services, was up just 0.2% q/q.”
“Core inflation was weaker than expected. The trimmed mean rose by 0.37% q/q and the weighted median by 0.33% q/q (following an upwardly revised Q2 rise of 0.6% q/q). The average of the two measures rose by 0.35% q/q and was steady at 1.9% y/y. In six month annualised terms, core inflation looks to have lost momentum.”
“From a policy perspective, our expectation of two rate hikes in 2018 was not driven by an expected acceleration in inflation. A stabilisation in inflation close to the policy band seems a necessary precondition, however. The Q3 data suggests core inflation remains subdued, although still close to 2% in annual terms. On this basis we don’t think the Q3 result rules out rate hikes next year, though it certainly weakens the case somewhat.”
“Looking forward, the question is whether core inflation is again slowing and the annual profile set to decelerate. The Q4 reading has always been likely to be soft, given the technical changes. The key issue is the pace of inflation in 2018. With retail price inflation set to remain under pressure, the onus is heavily on stronger wage growth to lift domestic inflation pressures. Encouragingly, there are signs that wage growth is stabilising, and the strength in the labour market points to a gradual acceleration.”