Australian headline inflation rises above expectations in Q3

Australia’s inflation data came in mixed for the third quarter of 2016. The consumer price inflation accelerated to 0.7 percent in sequential terms, slight more than the market projections of 0.4 percent rise. Huge gains were recorded in prices of fruits and vegetables, which rose 19.5 percent and 5 .9 percent, respectively. On a year-on-year basis, the headline CPI accelerated to 1.3 percent in the September quarter from 1 percent in the June quarter.

In the meantime, underlying inflationary pressures continue to be weak with the average of the two underlying measures rising 0.32 percent sequentially. Core inflation, in year-on-year terms, was up 1.5 percent, a tad softer than the second quarter’s rise of 1.6 percent. Consumer price index, stripping volatiles, rose 0.3 percent sequentially in seasonally adjusted terms.

Tradable inflation climbed 1 percent in sequential basis in the September quarter, but this greatly shows the increase in the prices of fruit and vegetable. Admittedly, tradable inflation excluding volatiles and tobacco rose a subdued 0.3 percent quarter-over-quarter after a drop of 0.1 percent in the second quarter. Non-tradable inflation was up 0.5 percent, with electricity prices significantly contributing 5.4 percent.

The housing group recorded a sequential rise of 1 percent, showing a 0.3 percent increase in rental inflation and a weak 0.4 percent rise in new dwelling purchase prices, noted ANZ.

The Reserve Bank of Australia is expected to be worried by the weak tone of underlying inflation. With today’s data, it is quite early to say that disinflationary pressures are waning or stabilizing. Furthermore, the outcome is lower than the central bank’s suggested quarterly projection and is expected to set off a slight downward revision to the RBA’s inflation profile in the November SoMP, according to ANZ.

The inflation data makes the monetary policy outlook slightly difficult; however, it is unlikely that the central bank would see any urgency for a policy response. Given that inflation remains low and is yet to stabilize, the RBA would be cautious about the ongoing strength in the housing market and the possible financial imbalances. The new, more flexible statement on the monetary policy’s conduct gives larger scope to bear below-target inflation. Furthermore, the domestic economy appears to be strong, while the AUD has stabilised and commodity prices continue to increase.

However, the data might strengthen the central bank’s easing bias and increase the odds of reducing rate sometime in the first half of 2017. This might permit the central bank to evaluate developments in the labor and housing markets.

“We think that the inflationary pressures are stabilising and that the RBA will remain on hold with the cash rate stuck at 1.5% over our forecast period”, added ANZ.