Australia | Jul 23 2008
By Greg Peel
The headline CPI came in at 1.5% for the June quarter, taking the annual rate to 4.5%. The underlying rate increase was 1.1%, for an annual 4.4%. The Reserve Bank pays heed to the underlying.
The underlying result came in pretty much smack on consensus expectation. The headline result exceeded a consensus of around 1.2%, but there was a blip in the system. It had come to the attention of the Australian Bureau of Statistics that it had not been correctly accounting for increases in bank fees and charges in previous quarters. To this end the ABS decided to make amends, but whacked the whole lot into the June quarter headline result. This accounted for 0.3% of the 1.5% rise, suggesting that without the adjustment the headline rate, too, would have met expectation.
Increases in bank fees and charges can be put down to a flow-though effect of the credit crunch as banks try to grapple with lost margins brought about by increased funding costs.
Aside from the bank charges, the usual suspects were present in the figure. Oil chimed in of course, as did rents, along with health fund premiums. Even the alcopop tax made a little contribution. There wasn’t much joy on the flipside, but the cost of food has eased slightly along with domestic travel and electronic goods.
However, 43% of the total of prices monitored in calculating the CPI increased by more than 1%, the economists at ANZ noted, and that is strong inflation in anyone’s language. The result suggests, nevertheless, that inflation is not accelerating dangerously. While the ANZ economists remain among the most hawkish in their view on interest rates, they concede that the RBA will not raise the cash rate on the strength of this CPI. The central bank was already braced for a strong number anyway.
ANZ feels it is still too early to start talking rate cut. CommSec agrees that the RBA will simply stay on the sidelines for the foreseeable future. Westpac suggests it was disappointing that the effects of a slowing Australian economy did not produce a lower result, but it would appear inflation may now have peaked.
It was notable that the PPI, released on Monday, did not prove a good indicator for the CPI result. Economists had expected a headline PPI of 1.6% but got 1.0%, yet the CPI came in as expected if adjusted for the bank charge addition. This would tend to indicate that in the second quarter retailers were forced to pass some increased input costs onto consumers they had been holding back in previous quarters, lest margins turn negative. The lower PPI probably bodes better for next quarter’s CPI, but then if the oil price keeps falling, and food with it, we’re not going to worry as much anyway.
As far as the underlying CPI is concerned, there’s no doubt the prices of many things have risen, as indicated by the number of +1.0% items. Oil prices may fall, but it could be a long time before other prices also see a retreat as the Australian economy slows. Interest rate relief for borrowers is still a long way off, and the ramifications of higher interest rates have yet to pass through meaningfully into the system.