SCOREBOARD: CPI confusion

The higher-than-expected core inflation print brings little clarity to the RBA's next rates decision.

The data

- Headline CPI (Australia) was weaker than expected, being unchanged in the December quarter (a gain of 0.2 per cent expected; me at 0.4 per cent). Annually, CPI is 3.1 per cent higher, down from 3.5 per cent in the third quarter.

- The ABS reports that the biggest price increases were seen in domestic holiday travel (up 7.3 per cent), rents (1 per cent), beer and fuel (0.7 per cent). On the downside, the largest price falls were in fruit (down 13 per cent), pharmaceutical products (5.6 per cent), vegetables (5 per cent) and audio visual (-3.4 per cent).

- The average of the trim and weighted median came in at 0.6 per cent (0.5 per cent forecast) and when you combine upward revisions to third quarter data (was at 0.3 per cent, now at 0.4 per cent) brings core inflation by these measures to 2.6 per cent year-on-year. This is unchanged from the third quarter.

- Tradables inflation fell by 1.2 per cent in the quarter and is 1.8 per cent higher annually, while non-tradable inflation was 0.7 per cent higher in the quarter and 3.9 per cent higher annually.

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What it means

That core CPI is generally stronger than previously anticipated saw some decent selling on our futures – 3s off 9 ticks and 10s off 5 ticks at the low. Australian dollar then put on about 40 pips straight after. For the RBA’s next meeting (February 7) today’s number certainly confuses the picture. I wouldn’t say that it provides a smoking gun for a cut following the 50bps already done – I think that much is clear with core CPI in the middle of the band and headline still above. Generally you’d think the RBA would only cut again if they were of the view that core CPI was tending toward 2 or 2.25 per cent. That said, today’s result doesn’t argue strongly against a cut.

The problem is we are still none the wiser about what broader inflation pressures are doing and what inflation will look like by year-end. With all the cross-currents we face, core inflation sits around the middle of the target having been well above in the second quarter – headline is still above and we have the inflationary influence of the carbon tax to consider soon. The question for the RBA is whether inflation pressures are truly moderating then, or moderating sufficiently. Can anyone sit there, hand on heart and say inflation will be lower? Unfortunately, I don’t think we have any answers after these figures. For mine, the third-quarter core CPI result was always a bit odd given that private demand in that quarter was its strongest since 2007 – especially given the rapid acceleration in consumer spending that we’ve seen. I wouldn’t be surprised to see further upward revisions then.

Similarly, we have the distorting influence of fruit and vegetable prices as they adjust to increased supply and generalised commodity price volatility. Getting a read on true underlying momentum is hard in that environment.

My expectation is that some of the dampening influences on inflation will ease – so I think they are temporary and through the first half we will see inflation pressures rise such that core inflation will be back at the top of the band by year-end. I doubt the RBA board are of the same view though, but whatever their views they can’t be sure – so it’ll be interesting. But I’ll come back to the implications for the RBA meeting on Monday next week.

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