Australia | Jan 27 2010
By Chris Shaw
Inflation data released today have all but confirmed an increase in interest rates in Australia next month as the December quarter CPI data showed a gain in the headline rate of 0.5% quarter-on-quarter for the period. This was slightly higher than the 0.4% increase the market had expected and puts the annual rate at a gain of 2.1% year-on-year, up from 1.3% in the September quarter.
In underlying terms, the outcome was also higher than expected as on such a basis inflation gained 0.7% in quarter-on-quarter terms, which compared to market expectations of a gain of 0.6%. In annual terms this measure rose by 3.6%, down from 3.7% previously.
Westpac had been forecasting an increase in the headline rate of 0.4%. Chief economist Bill Evans notes the annual rate jumped to its highest level since the first quarter of 2009, though this was the result of the dropping out of the December quarter 2008 figure, which carried a fall in inflation of 0.3%.
While the underlying rate declined in annual terms, the fall was only from 3.5% to 3.4%, Evans taking the view on this basis the result for the December quarter was actually a somewhat soft one. But Commonwealth Bank economist James McIntyre takes the view as the Reserve Bank of Australia’s (RBA) inflation and growth forecasts already incorporate an assumption of further monetary policy tightening, today’s underlying result is likely to be somewhat discomforting as there is a low level of slack given the current point in the economic cycle.
As well, McIntyre suggests today’s data give a good insight as to the direction of revisions to growth and inflation expectations when the RBA releases its next Statement of Monetary Policy early next month.
Evans points out the detail of today’s data showed stronger than expected pricing in many discretionary items of consumer spending, especially in clothing and footwear, furniture and furnishings, household appliances, utensils and tools and the recreation group.
ANZ Economist Dr Alex Joiner notes fruits, domestic travel and accommodation, house purchase, rents also added to the gains, while falls in prices were recorded in fuel, audio visual and computing equipment and pharmaceuticals. In his view the RBA is likely to be concerned non-tradeable inflation rose 0.8% quarter-on-quarter as a large portion of this is driven by utilities prices and housing costs and these are relatively inelastic to the level of interest rates.
In Joiner’s view, today’s CPI data continue to suggest the Australain economy is in an advanced state of recovery so he sees it as all but assured the RBA lifts intrest rates by 0.25% when it meets next week. The risk now is the RBA sees a need to get to a more neutral rate setting faster than was previously expected, so increasing the chances of additional rate hikes in coming months.
Having previously suggested the RBA would hike by 0.25% next week even if today’s CPI data woud be surprisingly weak, Evans sees nothing in the numbers to change this view. He agrees with Joiner in that the detail of the data won’t be any comfort to the RBA and so it is likely to continue to act to restore the cash rate to a neutral level of around 4.5% by this June at the latest.
McIntyre agrees a rate hike next week seems assured as indicators continue to suggest the recovery is well founded and underway, while he expects the upcoming monetary policy statement should include some guidance on the likelihood of a fifth consecutive rate rise in March.