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Wednesday, 26 October 2016
Inflationary pressures remain...weak
Apples & bananas
The headline result for inflation was slightly higher than expected by the market (though not me!) at +0.7 per cent in the third quarter.
As I noted here during the week, fruit & veg costs did indeed prove to be one of the key drivers with a massive +19.5 per cent spike in fruit prices following localised flooding, while housing utilities costs also spiked as had been correctly identified by market analysts.
"The rise in fruit and vegetable prices is due to adverse weather conditions, including floods, in major growing areas, impacting supply."
As expected, an offset came from lower communication costs and, for the time being at least, fuel prices.
Soaring fruit prices helped to take annual headline inflation up a bit from a 17-year low of +1 per cent to +1.3 per cent.
The pace has quickened a little, then, but of course remains well below the 2 to 3 per cent target range.
Traders backed this uptick to mean that interest rates will be on hold until next year, with the Aussie dollar jumping.
I tend to agree with market sentiment given the recent rhetoric from the Reserve Bank.
But when you drill in to the underlying inflation figures, the November 1 meeting could still arguably be a marginal call.
The quarterly core inflation figures were very soft in Q3, with both the trimmed mean (+0.35 per cent) and weighted median (+0.28 per cent) quite a lot weaker than target.
The figures may look a bit more solid when rounded up to +0.4 per cent and +0.3 per cent respectively.
But still, very soft, and even with an upwards revision to the Q2 trimmed mean figure the 6-month annualised core figures also remain below the target range, averaging out as they do at +1.55 per cent.
In terms of the outlook, annual non-tradables inflation has apparently stabilised at +1.7 per cent, below target for the third quarter in a row, but slightly higher than the +1.6 per cent recorded last quarter.
This is important because non-tradables inflation is taken to be a reasonable proxy for domestic inflationary pressures, and as the red line shows, there essentially is no such pressure at the moment.
Overall, this was another weak set of inflation numbers which leaves plenty of room for another interest rate cut as and when it is deemed necessary.
The main reason I don't think that will happen this year is housing. In short, the Reserve Bank probably doesn't want to stoke up the fire in Sydney's property market belly too much.
And it appears that the new Governor is relatively comfortable with inflation running below target for a while. Thus, sitting pat until 2017, I think.
Jeepers, it could still be a close call, though, with such benign numbers.