Inflation figures expose carbon scare campaign
The Bureau of Statistics reports that in the year to June, consumer prices rose 2.4 per cent on the raw data, 2.3 per cent after seasonal adjustment, and 2.2 per cent on the trimmed mean measure, which strips out the biggest price rises and falls to define underlying inflation.
If you take out the September quarter - as the next set of inflation figures will - then inflation over the nine months to June was running at an annualised rate of just 1.3 per cent. Underlying inflation is tracking at 2 per cent.
And while the dollar has fallen in the past three months and petrol prices have jumped, it's odds-on that the next measure of inflation will start with a 1.
That is low inflation by any measure. It shows the Coalition's scare campaign against the carbon tax was just a scare campaign. And it sets no bar to the Reserve Bank board cutting interest rates again on Tuesday week if it believes the state of the economy warrants it.
Most analysts think it does. In the six months to March, the economy grew at an annualised rate of 2.25 per cent, and output per head grew at an annualised rate of just 0.5 per cent. That is an economy clearly underperforming, and the data released since gives little reason to think it is growing faster now.
Before the inflation figures came out, financial markets had priced in a 67 per cent chance of a rate cut next week. After the data appeared, some took fright, because analysts had forecast that underlying inflation would rise by 0.5 per cent, and, woe! the average of the two measures the Reserve relies on was 0.6 per cent.
The RBA's two measures of underlying inflation are not equally reliable. The one which rose by more than expected (0.7 per cent) in the June quarter was the weighted median, which is very lumpy and prone to lean excessively either way, depending on the exact order of price rises for particular items. The Reserve has yet to disown it publicly, but it might as well.
The trimmed mean measure of underlying inflation rose just 0.5 per cent over the quarter and 2.2 per cent over the year. That implies that inflation is still where we thought it was: squashed down by a weak economy in which firms are ultra-cautious about raising prices.
Bear in mind that before the carbon tax came in, Treasury estimated that it would lift the CPI by 0.7 per cent, and underlying inflation by 0.4 per cent. If that's right - and some analysts looking at the data think the tax's impact was even less than that - then without the carbon tax, the CPI would have risen 1.7 per cent, and the trimmed mean by 1.8 per cent.
There is no sign in these figures that the carbon tax has had any impact after the initial bounce last September.
Frequently Asked Questions about this Article…
The Bureau of Statistics reported consumer prices rose 2.4% on the raw data, 2.3% after seasonal adjustment and the trimmed mean (an RBA measure of underlying inflation) was 2.2% year‑on‑year. Inflation over the nine months to June was running at an annualised 1.3%, and underlying inflation is tracking around 2%. For everyday investors, low inflation matters because it influences Reserve Bank policy, interest rates and corporate pricing power.
Treasury estimated the carbon tax lifted the CPI by about 0.7% and underlying inflation by roughly 0.4%. Using those estimates, the article says that without the carbon tax the CPI would have been about 1.7% and the trimmed mean around 1.8%. The piece argues the Coalition’s scare campaign over the carbon tax overstated its ongoing inflation impact and finds no sign of a persistent effect after the initial bounce.
The weighted median picks the middle price change and can be ‘lumpy’ — prone to swings depending on the order of price moves — while the trimmed mean strips out the biggest rises and falls and smooths volatility. In the June quarter the weighted median rose 0.7% (more than expected) and the trimmed mean rose 0.5% (putting annual trimmed mean at 2.2%), with the article suggesting the trimmed mean is the more reliable guide.
Yes. The relatively low inflation readings remove a barrier to another Reserve Bank rate cut if the RBA judges the wider economy warrants it. Financial markets had priced in about a 67% chance of a cut before the data; the article argues the low underlying inflation strengthens the case for easier monetary policy.
The economy grew at an annualised 2.25% in the six months to March while output per head rose only 0.5% — signs of an underperforming economy. That weak growth has kept inflation squashed, as firms are cautious about raising prices. For investors, slower growth and low inflation can mean more pressure on corporate profits, and a higher chance of easier monetary policy which affects bond yields and equity valuations.
The article notes the dollar fell and petrol jumped in the past three months, which could nudge the next inflation print up slightly. Still, the piece suggests it’s likely the upcoming figure will remain low — starting with a '1' — so any increase may not be enough to materially change the low‑inflation backdrop.
Some analysts had forecast a 0.5% rise in underlying inflation for the quarter, and the average of the RBA’s two measures came in around 0.6%, higher than expected. The weighted median’s 0.7% rise — a lumpy measure — caused particular concern, prompting a short‑term nervous reaction in markets despite the broader picture of low inflation.
According to the article, there is no sign in the June figures that the carbon tax has had any ongoing effect after the initial price bounce last September. Analysts looking at the data think the tax’s impact may have been smaller than Treasury’s initial estimates.
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