Q2 CPI: Some AUD pass-through but housing is the anchor on inflation - Justin Smirk
Incorporating revisions, the six month annualised growth in core inflation was flat at 1.3% over the year well below the bottom of the RBA target band and the slowest pace since March 1999.
Standouts in the quarter were: on the positive or high side of expectations, clothing & footwear which suggests we are starting see some impact from the AUD depreciation, stronger transports cost which was not just due to a jump in fuel prices but also a surprising 1.4% bump in automotive prices while the seasonal fall in pharmaceuticals was smaller than the historical norm.
Prices that fell or where on the low side of expectations – tobacco prices surprised with a fall, housing was flat on falling house purchases and utilities, household contents fell more than expected while health rose less than expected and recreation fell more than expected.
Food prices fell as expected, with falling fruit & vegetable prices more than offsetting rising prices elsewhere. For now, the impact of the drought has been limited but we are watching this space closely as it extends in length and depth.
It is worth noting the lack of inflationary pulse in housing. Overall housing costs fell a little more than expected as falling dwelling prices combined with falling electricity prices and flat rents. This moderation in housing costs is central to our outlook for low non- tradable and core inflation.
In nine of the ten quarters to the 2019 Q1, inflation forecasters overestimated the quarterly rise in the CPI by 0.12ppts. Including Q2 analysts’ have now underestimated the quarterly print for the CPI in two quarters of the last three quarters. This suggests that the disinflationary pulse may be fading, if not coming to an end.
There are still some embryonic indicators that retail, in particularly clothing & footwear, furniture & appliances as well as motor vehicles, are turning modestly inflationary due to the AUD depreciation.
However, housing has a significant weight in the CPI (22%) so it has a meaningful impact on both headline and core inflation. As such, it is hard to find any near- term risk of a meaningful acceleration in inflation.
Our preliminary estimate for Q3 CPI is 0.4% in the quarter/1.6% over the year for headline and 0.3% in the quarter/1.5% over the year for the trimmed mean.
Waiting for Godot has ended its long run
In the December quarter 2018, for the first time in two year the quarterly rise in the CPI exceeded market expectations. However, the first quarter of 2019 saw a return of a disinflationary pulse with the CPI print coming in under expectations with a flat print.
Then it was reversed again in the June quarter with the CPI rising 0.6% vs. a median expectation for 0.5%.
Including Q2 analysts’ have now underestimated the quarterly print for the CPI in two quarters of the last three quarters. This suggests that the disinflationary pulse may be fading, if not coming to an end.
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ABS confirms June quarter negative seasonality
As noted in our preview the June quarter 2019 was expected to be a seasonally soft quarter.
However, on the estimates from the March quarter the estimated seasonal adjustment was +0.2ppt.
In the June quarter release the seasonally adjusted CPI rose 0.7% so the seasonal adjustment factor was a smaller 0.1ppt.
Revisions to the seasonal factors are a regular occurrence with the ABS conducting concurrent seasonal reanalysis.
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For core inflation, the trimmed mean lifted 0.4% in the quarter
The average of the core measures, which are seasonally adjusted and exclude extreme moves, rose 0.4% in the June quarter.
In the quarter, the trimmed mean gained 0.28%/1.6%yr while the weighted median lifted 0.37%/1.2%yr.
The annual pace of the average of the core measures printed 1.4%, a very modest deceleration from the 1.5% pace in the March quarter.
Incorporating revisions, the six month annualised growth in core inflation was flat at 1.2% over the year, holding well below the bottom of the RBA target band and the slowest pace of core inflation since March 1999.
For a broader core inflation measure, more in line with some international measures, market sector goods and services excluding volatile items rose 0.5% in the quarter with the annual pace lifting to 1.8% from 1.6%.
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We are yet to see the full inflationary impact of the drought
Food prices came as expected at 0.4% decline. Fruit & vegetables fell slightly more than expected (2.8% vs 2.1%).
Alcohol & tobacco was slightly stronger (1.1% vs. 1.0%) with tobacco having a robust 2.4% rise following a surprising 0.7% in Q1.
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A surprising bump up in car prices
Transportation rose 3.4% vs. 2.9% expected as car prices lifted 1.4% vs. our expectation for a 1.0% fall.
Car prices are now up 3.4%yr, the fastest pace of growth since June 2020 and another sector we would expect to see the impact of the weaker AUD.
However, the rise in car prices is more than what you would expect given the weakness of the AUD in either TWI terms or against the Japanese Yen.
Clothing has a larger than expected bump highlighting AUD pass-through...
Clothing & footwear was stronger than expected rising 1.6% vs. our 0.5% expected. We are now seeing some pass through of the weaker AUD but the impact has not been uniform across this sector.
Male garments are up 4.8% over the year while garments for women are down 0.2%. Footwear is down 1.1% over the year while accessories are down 1.0%.
...as does the rise in household contents & services.
An area where the downside pressure on prices has been significant was household contents & services.
In the June quarter they rose 0.7% vs. our expectation for a 0.5%. There has been a turnaround in the trade exposed components with furniture prices up 2.8% over the year and household appliances up 5.1%.
However, it is not all one way with textiles down 0.5% over the year and glassware down 4.1%. All up household furnishings are down just 0.4%, the softest deflationary pace since March 2018.
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Housing reveals signs of the housing correction in Vic and Qld, not so strong in NSW
The slightly softer than expected housing print reflected the fall in dwelling prices (0.2% vs. our forecast for a flat print – this reflected a further fall in Victorian dwelling prices of 0.4% in the quarter, a larger 0.6% fall in Brisbane and a more modest 0.1% fall in NSW).
Rents were flat as expected while utilities fell more than expected (1.0% vs. 0.4% forecast) due to a 1.7% fall in electricity prices.
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There remains a significant near term negative risk around dwelling purchases prices in NSW.
Prices are already falling in Victoria while rents have flattened in NSW. Given that rents and dwelling purchases together are worth around 15% of the CPI, this is a significant risk for headline inflation, and even more so for the core measures where the weight is somewhat higher.
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Tradables stronger while non-tradables had a modest rise
Tradables rose 1.2% in the June quarter. Tradable goods rose 1.2% due to automotive fuel (10.2%). Tradable services rose 2.5% due to international holiday, travel and accommodation (2.7%).
Non-tradables rose 0.2% in the June quarter. Non-tradable goods rose 0.2% due to tobacco (2.4%). Non-tradable services rose 0.3% due to medical and hospital services (2.6%).
Looking forward inflation holds below the band
There are signs that we are getting some AUD deprecation pass-through to inflation in clothing & footwear (for some selected groups) and in automotive vehicles. But it is harder to find any broader impact or wider inflationary pulse.
As housing has a significant group weighting in the CPI (22%) it has a meaningful impact on estimates of both headline and core inflation. As such, with core inflation below the bottom of the RBA’s target band we can find little to suggest any risk of a meaningful acceleration.
With crude oil prices easing there has been a turnaround in fuel prices which are expected to be a drag in Q3. Our preliminary estimate for the June quarter 2019 CPI is 0.4% which would see the annual pace steady at 1.6%.
Our preliminary estimate for the trimmed mean in the September quarter CPI is 0.3% seeing the annual pace ease a touch to 1.5%.
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Justin Smirk is senior economist, Westpac Group and can be contacted here.