Carbon CPI kick won't stop RBA

The government's carbon pricing scheme has contributed about half of the higher-than-expected CPI rate, but it won't be enough to put the brakes on an expansionary RBA.

The inflation rate came in a touch above expectations, pushed higher by the well documented rise in electricity and gas prices (utilities prices accounting for 0.5 per cent of the 1.4 per cent lift in the CPI) and a jump in international holiday travel costs which accounted for another 0.15 per cent of the rise.

Both of these have a substantial element of carbon pricing in them. There was probably a trickle through of another 0.1 or 0.2 per cent to other elements in the CPI which suggests that close to half of the CPI rise was due to the carbon tax.

The annual CPI of increase of 2 per cent would have risen around 1.4 per cent without the carbon price.

This means that demand driven inflation remains low which will allow the RBA to cut interest rates at its next meeting on November 6. With global markets faltering and downside risks to the domestic outlook intensifying, a 25 basis point cut to 3.0 per cent looks assured. A lower CPI may have opened the door for a 50 basis point.

The RBA underlying measures which take out some, but not all, of the carbon price effect rose 0.7 per cent in the quarter for an annual rise of 2.5 per cent. Based on the figuring prepared by the RBA prior to the release of the CPI, perhaps 0.2 percentage points of the rise in underlying inflation was related to the carbon price.

There are a few other issues to note. Bread prices rose 2.9 per cent in the quarter, probably the result of the US drought which boosted wheat prices. Due to poor seasonal conditions, vegetable prices rose a large 10.5 per cent in the quarter, while fruit prices rose 9.7 per cent. There was a 4.5 per cent rise in medical and hospital services which results from the means testing reforms of the Private Health Insurance Rebate. These are unlikely to be ongoing factors influencing the CPI in future quarters.

On the down side, petrol prices fell 3.9 per cent in the quarter while car prices fell a further 1.0 per cent. Electronic good prices continue to fall as well.

All up, it was a slightly higher than expected CPI, but not one so high or so full of surprises that it will stop the RBA trimming rates next month. The market is still giving a 25 basis point cut a 60 per cent chance and is still looking for the cash rate to be cut to 2.5 per cent during 2013.

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