Australia Q3 CPI Up 1.6% Mainly on Child Care; Price Level Back to December 2019

By Sophia Rodrigues

Australia’s consumer price index inflation rose 1.6% q/q in Q3 but that followed a 1.9% decline in Q2 and a small rise of 0.3% in Q1, taking the overall price level back to the December 2019 quarter levels.

In y/y terms, inflation rose 0.7% q/q, after a 0.3% fall in Q2, data published by the Australian Bureau of Statistics Wednesday showed.

The data is supportive of further easing in the Reserve Bank of Australia’s monetary policy which is expected at the November 3 board meeting.

The RBA has already committed to keeping monetary policy easy until actual inflation rises to the target band, and forecasts show the upward trajectory is sustainable. Hence inflation outcomes are unlikely to have significant impact on RBA’s policy deliberations for at least a few quarters.

In Q3, the largest contributor to the quarterly inflation was child care fees which rose 1,382% q/q, after a 95% decline the quarter before. Child care contributed 0.9points to the q/q inflation, and excluding its impact, inflation would have risen 0.7%.

Other significant contributors to inflation were automotive fuel which rose 9.4% q/q following a rebound in world oil prices, and pre-school and primary education which rose 11.1%.

The furnishings, household equipment and services group was another notable contributor, rising 12% q/q due to strong demand and supply shortages, but in y/y terms it fell 0.1%.

Among the drags on CPI were the food and non-alcoholic beverages group which fell 0.4% and the housing group where q/q CPI was flat.

In case of the housing group, there was a rebound from a 0.7% fall in Q2 but in y/y terms it fell 0.2%.

For the RBA, the main concern would be housing rent which fell in most capital cities due to continued weak rental market conditions and high vacancy rates due to Covid-19. Rents recorded the first annual fall in the history of the series, the ABS said.

Weak rent has an impact on not just inflation but could also force selling by housing investors, which could lead to a weakening in housing market. So far, the housing market has been resilient, but RBA Assistant Governor Michelle Bullock warned in a speech on Tuesday that a substantial fall in housing prices could lead to bigger losses to banks on housing loans portfolio.