Headline CPI Back To Target
The latest CPI data for Australia showed that inflation rose 0.5% QoQ over Q1, boosted mainly by higher food and fuel costs. Underlying inflation also increased slightly, with trimmed mean inflation increasing 0.5% QoQ also though weighted media inflation remained flat at 0.4% QoQ.
The majority of the increase in prices was driven by higher fuel costs and administered price changes for medical services. Volatile components such as vegetable prices also rose sharply fuelled by adverse weather conditions. On a YoY basis, headline inflation rose to 2.1% in Q1 from 1.5% in Q4 2016 marking the first +2% reading since 2014. There was also a mild pickup in underlying inflation.
Tradables & Non Tradables Moving Higher
Inflation rates for tradables and non tradables are both moving upward. CPI for tradables rose as expected by 0.5% from 0% in Q4 2016. On a YoY basis, tradable inflation rose to 1.3% while non-tradable inflation rose by 0.7%. This has moved the YoY inflation rate higher to 2.6% and was likely fuelled by continued strengthening in tobacco prices and the increase in dwelling purchases by owner-occupiers. However, rental inflation continues to stagnate rising only 0.09% over Q1.
The largest negative contributions came from the furnishing, household equipment and service group which was down -1% QoQ, due to lower furniture prices, as well as the recreation and culture group which was down 0.7% due to seasonal declines in the cost of foreign holidays.
Given the current environment, the RBA is unlikely to cut rates any further due to the risk that it could further exacerbate the already surging property markets in Sydney and Melbourne. Indeed, the RBA has signalled that the barrier for cutting rates has moved higher by giving lower inflation forecasts. Underlying inflation is forecast to move gradually higher but not return to the target band for quite a while. Essentially, it would require a downside surprise to these already-low inflation forecasts to justify any further easing.
