June quarter CPI -1.9%qtr/-0.3%yr Trimmed mean -0.15%qtr/1.2%yr Weighted median 0.07%qtr/137%yr
The ABS reported a -1.9% fall in the CPI in the June quarter (a record fall in the series 72 year history) which was less than Westpac’s -2.4% forecast and close to the market 2.0% estimate. The June quarter fall was mainly the result of free child care (-95%), a significant fall in the price of automotive fuel (-19.3%) and a fall in pre-school and primary education (-16.2%), with free pre-school being provided in NSW, Victoria and Queensland. Excluding these three components, the CPI would have risen 0.1% in the June quarter.
Significant one offs from the direct impact of the COVID shock (falling fuel -19.6%, housing -0.7%) as well as policy induced price declines (childcare -95% and education -3.7% in particular) hit the CPI very hard. This dragged the annual pace of inflation down to -0.3%yr but as many of the one-off shocks are set to be reversed in Q3, even if not fully, this will be enough to see the pace turn positive .
Despite many of the shocks being one offs that are set to be reversed, the COVID shutdown has shifted what we thought were signs of a recovery to a broader mixed outcome with signs of a underlying deflationary trend in many series again in Q3.
The core measures did highlight a broader deflationary pulse. The trimmed mean fell -0.15% (it gained 0.48% in the March quarter) taking the annual pace down to a record low of 1.2%yr. The weighted median rose 0.07% taking the annal pace down to 1.29%yr.
Turning to the details, compared to our forecasts the largest upside surprises were food (0.5% vs. -0.9%), alcohol & tobacco (1.5% vs. 0.8%), household contents & services (-11.2% vs -12.6%) and education (-3.7% vs. -4.5%). To the downside of our forecasts were clothing & footware (0.1% vs 0.4%), housing (-0.7% vs. -0.5%), health (-0.2% vs. 0.1%) and communication (-1.3% vs 1.0%).
Housing represents 23% of the CPI, and with rents and dwelling prices tending to be not that volatile they are almost always in the core measures, the trend in housing costs are important to defining the trend in core inflation.
Dwelling prices gained 1.0% (we forecast -0.5%) suggesting for now developers were able to hold a positive margin. We are watching closely to see if this can continue going forward as market data suggests not. Rent has a record fall of -1.3% (we though our forecast for -0.7% was bold). This is significant as rents capture all current rents, including public sector housing, and not just new contracts signed. As such the rental series tends to be quite stable compared to what is quoted in new contracts. We will have to see if we can determine the share of this fall is a real price adjustment and share that is just a COVID temporary adjustment.
Looking at the big one offs it is import to distinguished which are policy induced (so there should be a quick rebound to previous levels as short-term assistance is unwound) and those induced by the collapse in demand (fuel prices due to the collapse in crude prices) which have already seen something of a rebound so far through the September quarter. These prices are not expected to make a full recovery any time soon. Crude oil prices are off the lows but they are still down on where they were before the shock so at this stage we are only looking for fuel to bounce around 6% in the September quarter compared to a 19.3% collapse in the June quarter. Compare that to childcare where complete subsidisation has come to an end and prices are expected to bounce 2,900% in Q3 following a 95% collapse in Q2.
Our current forecast is for a 2.1% bounce in the CPI in Q3. We will work through the update information from the Q2 CPI and publish any revisions in our weekly this Friday.
In summary, the details in the June quarter CPI suggests the underlying inflationary momentum has softened in a material way. Even if we see the expected significant bounce in Q3 associated with the unwinding of government assistances packages, it will not be enough to drive a meaningful lift in underlying inflationary momentum.
