June Quarter Consumer Price Index (CPI) Headline CPI 0.6%qtr/1.6%yr Trimmed mean 0.42%qtr/1.6%yr Weighted median 0.37%qtr/1.2%yr
Inflation may have modest signs of life but remains well contained
The June Quarter CPI rose 0.6%qtr, slightly stronger compared to the market median, and Westpac‘s, forecast of 0.5%. At two decimal places, the CPI was 0.61% with the annual rate flat at 1.6%yr, a modest lift from the 1.3%yr pace reported in the March quarter. With a lift from the flat print in Q1, the six month annualised pace also lifted from 1.1%yr in Q1 to 1.6%yr in Q2. The six month annualised pace (using seasonally adjusted data) is starting to lift and does have the potential to drift back towards 2%yr through 2020. This highlights that the inflationary pulse continues to remain well below the bottom of the RBA’s target band and, at best, is likely to drift towards the bottom end of the band through the second half of 2020.
Following the December quarter report we argued that while we may have found a bottom for the disinflationary pulse, it was too early to call an emergence of a meaningful inflationary pulse. The March quarter report confirmed a lack of widespread inflationary pressure and this is little changed in the June quarter. There is some sign of pass-through from the depreciation in the AUD, evident by the modest lift in clothing & footwear inflation, and some strength in health costs and domestic travel and holidays, but overall, it is difficult to find broader inflationary pressure while the ongoing housing correction acts as a brake on core inflation momentum.
The average of the RBA’s core measures, which are seasonally adjusted and exclude extreme moves, rose 0.4%qtr. In the quarter, the trimmed mean gained 0.42%qtr/1.6%yr (market median 0.4%qtr) while the weighted median lifted 0.37%qtr/1.2%yr.
Incorporating revisions, the six month annualised growth in core inflation is now just 1.3%yr, well below the bottom of the RBA target band and holding the slowest pace since December 1997.
Some sign of AUD depreciation pass-through but hardly a robust inflationary pulse
There were very few standout positive or high side of expectations quarterly results.
Clothing & footwear lifted 1.6% vs. 0.5% expected. The PPI’s had been highlighting a pass-through from a weaker AUD in this sector but until now it had been constrained. But even within this group the pass-through is patchy. Garments for men are up 4.8%yr, garments for women are down 0.2%yr, while footwear is down 2.4%yr. We are yet to see the full impact of the AUD depreciation in this sector.
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.
Health costs rose broadly as expected but it is worth nothing that the 0.2% fall in pharmaceutical is much smaller than the historical norm and what was expected (–1.3%).
Against this, a number of prices fell or were on the low side of expectations.
Food prices fell 0.4% as expected, with falling fruit & vegetable prices more than offsetting rising prices elsewhere. For now, the impact of the drought has been limited in its impact in boosting prices outside of fresh lamb but we are watching this space closely as the drought extends it length and depth.
Housing fell 0.2% (–0.1% forecast) on flat rents, falling dwelling purchases (–0.2% vs –0.1% expected) and a larger fall in utilities (–1.0% due to larger than expected fall electricity prices).
There remains a significant near term negative risk around dwelling purchases prices in NSW. Prices are already falling in Victoria (now –2.0%yr) and Brisbane (–0.7%yr) but are more robust in NSW (2.1%yr). By comparison rents have softened in NSW and Brisbane (both 0.3%yr) compared to the 1.7%yr pace in Melbourne but still more robust than the 3.7%yr decline in Perth. Given that rents and dwelling purchases together are worth around 15% of the CPI, housing still represents a potentially significant drag on headline inflation, even more so for core where the weight is somewhat higher.
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%).
Inflation is stuck well below the target band with little reason to expect it to return there anytime soon even with some AUD pass-through
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.
With housing having a significant group weighting in the CPI (22%), trends in this group have a meaningful impact on both inflation and core inflation. With such a modest outlook for housing costs we can find little to suggest any risk of a meaningful acceleration in core inflation that will lift it back into the RBA’s target band.
