September quarter CPI came in less than expected: AMP Capital's Shane Oliver

September quarter CPI came in less than expected: AMP Capital's Shane Oliver
September quarter CPI came in less than expected: AMP Capital's Shane Oliver

GUEST OBSERVER

The September quarter CPI came in less than expected.

Headline inflation was 0.5% quarter on quarter resulting in annual inflation of just 1.5% year on year. This compared to a market consensus expectation for 0.7%qoq/1.7%yoy.

The statistical underlying measures of inflation (trimmed mean and median) rose just 0.3%qoq (compared to the market consensus of 0.5%qoq) with an average 2.15%yoy, which is at the low end of the RBA’s target range. 

Market goods and services excluding volatile items also just rose 0.4%qoq and just 1.7%yoy.

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September quarter CPI came in less than expected: AMP Capital's Shane Oliver

While the impact of the fall in the $A is evident in some areas, eg international travel costs up 4.6%qoq, its very muted with tradeable prices up just 0.3%qoq and actually down 0.3%yoy or being offset by weakness elsewhere with non-tradeable inflation up just 0.4%qoq and 2.6%yoy.

In fact, what is particularly noticeable is general price weakness with, eg, weak food prices (+0.2%yoy) as supermarket competition continues, falling clothing prices (-1%yoy), very modest increases in rents (just +1.5%yoy), weak growth in household equipment (+1.8%yoy) and ongoing weakness or falls in prices for communication and electronic goods. The bottom line is that pricing power remains very weak reflecting constrained growth in retail sales and cautious consumer confidence.

The fact that inflation is lower than expected and below target despite a 20% plus fall in the value of the $A over the last year adds to the case for the RBA to cut the cash rate again in order to offset the potential negative impact on the economy of big bank mortgage rate hikes. I continue to expect the RBA to cut the cash rate by 0.25% when it meets next week or if not then, then sometime in the next few months.

 

SHANE OLIVER is head of investment strategy and economics and chief economist at AMP Capital and is responsible for AMP Capital's diversified investment funds.

Tags: 
cash rate

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