Analysis: Gentle Turning Point for Australia Inflation?
- Published on
- 29 Jan 2020, 01:57 PM
By Sophia Rodrigues
The Reserve Bank of Australia has been making reference to gentle turning point for Australia’s growth but the latest inflation data shows it can now extend this reference to inflation too.
So, at least for now, Governor Philip Lowe can feel a bit relaxed that he is on track, albeit a slow one, to deliver growth, employment and inflation objectives for the economy.
Data published by the Australian Bureau of Statistics Wednesday showed Q4 headline inflation rose 1.8% year-on-year, marking the fourth straight quarter of acceleration. Headline CPI rise 1.3% in Q1, 1.6% in Q2 and 1.7% in Q3.
In q/q terms, headline inflation rose 0.7%, the fastest pace of increase since Q4 of 2016. Inflation rose zero percent in Q1, 0.6% in Q2 and 0.5% in Q3.
The rise in headline CPI was mainly on account of tobacco, domestic holidays, travel and accommodation, automotive fuel and fruit. Overall, food price rose 1.3% in Q4 due to drought conditions.
Trimmed mean inflation rose 0.4% q/q and 1.6% y/y, in line with the RBA’s expectation.
While the RBA’s inflation target is the headline CPI, it pays more attention to trimmed mean measure because quarterly movements in the headline can be volatile. Trimmed mean enables the RBA to assess current inflation pressures and the outlook for CPI.
The acceleration in headline CPI is important because it has the potential to drive a rise in underlying inflation via its impact on inflation expectations.
Apart from that, there are other details in the data that could provide some comfort to the RBA.
Housing group, which has the largest contribution to CPI, rose just 0.1% q/q, slowing from 0.3% in Q3 but coming quarters could see some acceleration.
New dwelling purchases by owner-occupiers rose 0.4% q/q after three quarters of fall, and reflects the impact of rise in house prices. While electricity and gas prices fell and the outlook for them is unclear for this quarter, there is a possibility that prices could rise.
Rent was unchanged in Q4 but there has been subtle improvement in rental growth according to CoreLogic Hedonic Home Value Index report for December.
Food prices could remain elevated in the current quarter due to the combined impact of bushfires and drought.
There was a possibility of a bright spot in Recreation and Culture which has the second largest weighting but in the near term they could be dragged down by the impact of bushfires and CaronoVirus.
In Q4, Recreation and Culture rose 0.9% q/q despite negative contribution from international holiday travel which fell 2.9%. For the first time since 2015, this sub-group has risen for three straight quarters.
--Contact: sophia@centralbankintel.com