Australia Q3 CPI: Inflation comes in under expectations, again - Westpac

Justin Smirk, Research Analyst at Westpac, notes that in the third quarter the Australian CPI rose 0.6% for an annual pace of 1.8%yr, while the average of the core measures rose 0.4%qtr/1.9%yr.

Key Quotes

“Australia is locked in a low inflation environment

• What was surprising in the September quarter was that the components of the CPI came in broadly as we expected hence our below market forecast of 0.7%qtr on headline inflation and 0.3%qtr forecast for core inflation was very close to the mark. Where there were some difference between our forecast and the actual component print they did tend to the lower, rather than the higher, side of our estimates.
• The ABS analysis also points to significant seasonality in the September quarter CPI with the seasonally adjusted estimate rising 0.4%qtr which, which was some 0.2ppt lower than the headline estimate and bang on Westpac’s forecast.
• Broadly speaking the Australian economy appears to be locked in a low inflation environment where there are some sectors experiencing modest inflation, particularly around housing and health, but being mostly offset by deflationary pressure due to the competitive squeeze in consumer goods. At the stage we struggle to find any broad cyclical upswing in prices that you would normally expect to see at this stage of the economic recovery.”

“CPI by the details

• The Q3 CPI printed 0.0.6%qtr compared to Westpac’s forecast for 0.7%. The market median was 0.8%. The annual rate is now 1.8%yr compared to 1.9%yr in Q2 and 2.1% in Q1.
• The average of the core measures, which are seasonally adjusted and exclude extreme moves, rose just 0.4%qtr. In the quarter, the trimmed mean gained 0.37% while the weighted median lifted 0.33%, highlighting that there is little inflation pressure outside of housing (including energy) or health. The annual pace of the average of the core measures is now 1.9%yr from 1.9%yr in Q2 and 1.7%yr in Q1.
• More importantly the six month annualised pace of core inflation has dipped below the RBA target band printing 1.9%yr. Incorporating revisions, the six month annualised pace has only broken into the RBA target band once in the last two years with a 2.1%yr print in the June quarter 2017.
• As always there were some surprises in the release but for us the biggest surprise was the fact that the components behaved broadly as expected even if some of the moves were softer than we thought they would be.”

“For now our forecast see headline inflation peaking at 2.7%yr in the September quarter 2017 but we have to note that this is based on the current CPI weight and we estimate that the reweighting of the CPI could shave between 0.3ppt and 0.4ppts off the annual rate of inflation. And just as importantly, given that the run of soft updates that point to the Australian economy being in a low inflation trap, we would suggests the risks to these forecasts still lie to the downside.”