All right, with something in reserve
The central bank wants to see inflation within a range of 2 per cent to 3 per cent and, if it is, it has room to cut rates further if necessary. Headline inflation in the March quarter was 0.4 per cent, bringing the annual rate to 2.5 per cent. The two most closely watched underlying CPI measures put inflation at 2.2 per cent and 2.6 per cent.
Underneath the headline result, tradeable prices fell by 1.2 per cent in the quarter and by 0.2 per cent in a year, and non-tradeable prices rose by 1.3 per cent in three months, and 4.2 per cent in a year.
The non-tradeable inflation result was led by a 3 per cent rise in healthcare prices and a 5.7 per cent jump in education prices, but both included seasonal elements. School fees are reset at the start of each year, for example, and in the second half of the June financial year individual caps on pharmaceutical benefits become a factor, pushing some users of prescription drugs onto higher prices.
There is a longer-term inflation signal hidden inside the trading price result, however. Prices of traded goods are down mainly because the Australian dollar is stubbornly high: they will rise when the $A falls.
Wednesday's CPI numbers were much better than expected - market economists were expecting a 0.7 per cent March-quarter rise - and they give the central bank plenty of headroom.
The Australian dollar fell by about half a US cent just after the CPI result came out on that thinking, but a rate cut when the Reserve next meets on May 7 is far from assured.
As HSBC economist Paul Bloxham noted this week, there are growing signs that the central bank is getting traction after cutting its cash rate from 4.75 per cent to 3 per cent between October 2011 and December last year.
There are concerns that a crunch could come next year if the resources sector retreats before activity in the rest of the economy has picked up.
It could happen if Woodside's decision to shelve the $40 billion-plus Browse LNG development in the face of cost blowouts, a high $A and soft prices is a harbinger of coal seam LNG export project deferrals in Queensland, or if the rest of the economy is slow to accelerate.
The non-resources economy does have a better feel about it than it did late last year.
Retail sales rose by a seasonally adjusted 1.3 per cent in February, and are up 3.2 per cent in a year. Building approvals rose by 3.1 per cent in February and by 12.8 per cent in a year. House prices rose by 1.7 per cent in the March quarter, and by 3.2 per cent in a year.
The housing picture changes from city to city. Australian Property Monitors estimates that Melbourne house prices are still 4.2 per cent below their mid-2010 peak, for example, while Sydney prices are 4 per cent above their mid-2011 high. Brisbane prices are still 7 per cent short of a mid-2010 peak, and Adelaide is 6.1 per cent below its mid-2010 peak.
Clearly the housing market is recovering from the hangover that came after the boom in 2009 and the first half of 2010 when rates were tumbling and global crisis stimulus including first home buyer grants were on offer.
Melbourne house prices rose by a ridiculous 30 per cent during that time, and Sydney prices rose by 20 per cent. The current steady rate of growth is healthier, and more rate cuts might actually push demand and prices up too hard.
There are caveats, of course. The retail turnover numbers may be being boosted by carbon tax household assistance, for example. Corporate reinvestment in the non-resources economy has not taken off, and right across the economy employment prospects are less secure than they were last year as companies chase productivity growth. But the trend seems to be improving and, after this inflation result, there is no doubt the Reserve can cut rates at least twice if it changes.
China shop bullish
The Reserve Bank also kicked a goal on Australia's behalf on Wednesday with deputy governor Philip Lowe's announcement in Shanghai that the central bank will invest about 5 per cent of its foreign reserves in Chinese government bonds.
The move follows last year's negotiation of a currency swap facility between the Reserve and China's central bank, and this month's announcement that the $A would join the US dollar and the yen in being directly traded with the yuan. The moves make sense given the size of the trading relationship between the two countries: and by buying Chinese government bonds the Reserve is taking a position in a currency that should appreciate over time, on its way to becoming one of the world's key reserve currencies.
mmaiden@fairfaxmedia.com.au
Frequently Asked Questions about this Article…
The March-quarter CPI rose 0.4% (bringing annual headline inflation to 2.5%), while the two main underlying measures were 2.2% and 2.6% — a result that suggests inflation is inside the RBA’s 2–3% comfort zone and gives the central bank room to consider rate cuts if needed.
Tradeable prices fell 1.2% in the quarter (down 0.2% year‑on‑year) mainly because a high Australian dollar lowers imported goods costs, while non‑tradeable prices rose 1.3% in the quarter (up 4.2% annually) driven by seasonal jumps in healthcare (+3%) and education (+5.7%); investors should note these different drivers because currency moves can lift tradeable inflation while domestic services push non‑tradeable inflation.
The Australian dollar fell by about half a US cent after the CPI came out, reflecting market expectations that softer inflation gives the RBA more room to cut rates; currency moves can influence returns for investors with international exposures and can affect prices of imported goods.
The softer‑than‑expected CPI gives the RBA more headroom to cut, and the article notes the central bank could cut rates if it chooses (it has scope to cut at least twice), but a rate cut at the May 7 meeting was described as far from assured.
The article highlights the risk that a resources‑sector retreat could trigger a broader slowdown — for example, Woodside shelved its more than $40 billion Browse LNG project due to cost blowouts, a high A$ and weak prices, which could foreshadow further LNG project deferrals and weigh on the economy next year if other sectors haven’t picked up.
House prices rose 1.7% in the March quarter and 3.2% over the year, but markets vary by city: Melbourne was about 4.2% below its mid‑2010 peak, Sydney about 4% above its mid‑2011 high, Brisbane roughly 7% below its mid‑2010 peak and Adelaide about 6.1% below — the article describes the current steady growth as healthier than the earlier boom.
Retail sales were up a seasonally adjusted 1.3% in February (3.2% year‑on‑year), building approvals rose 3.1% in February (12.8% year‑on‑year), and the article notes these signs point to a better feel in the non‑resources economy, although caveats remain such as patchy corporate reinvestment and less secure employment prospects.
Deputy governor Philip Lowe announced the RBA will invest about 5% of foreign reserves in Chinese government bonds, building on a currency swap with China and direct A$–yuan trading; the move positions Australia in a currency (the yuan) that the article says should appreciate as it becomes a larger global reserve currency.
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