CPI Falls Back over 2Q
Australian CPI came in below expected over the 2Q printing 1.9% year over year, well beneath the 2.2% level forecast. Despite the decline underlying measures of inflation, which the RBA focus on, were in line with expectations at 0.5% quarter over quarter. However, annual underlying inflation remains below the bank’s 2%-3% target at 1.8% year over year. The two readings taken together show the strongest reading for underlying inflation since 2015, further increasing hawkish expectations for the RBA.
Breaking down the data
- Trimmed mean and weighted median CPI both increased 0.5% quarter over quarter and 1.8% year on year, in line with expectations.
- CPI excluding volatile items rose 0.4% quarter over quarter and 1.5% year on year
- CPI inflation was 0.2% quarter on quarter and 1.9% year on year
- Tradable inflation was -0.3% quarter on quarter and 0.4% year on year
- Non-tradable inflation was 0.4% quarter n quarter and 2.7% year on year
- The largest positive contribution to inflation was from health, rising 2.7% quarter on quarter as a result of the annual rise in private health insurance premiums. The housing also increased 0.3% quarter on quarter as a result of higher purchases for new dwellings.
- The largest drag on inflation came from both transport, which printed -0.6% quarter on quarter due to lower petrol prices, and the recreation and culture group which printed -0.7% quarter on quarter due to seasonal declines in the cost of domestic holidays and continued weakness in the price of audio-visual equipment
Despite the fallback in prices over the 2Q, the broader picture shows that inflation is generally moving higher. Indeed, the two key readings of underlying inflation were in line with expectations and showed the strongest combined readings since 2015 while non-tradable inflation printed its highest level in three years.
While the weaker print was explained through lower petrol prices, the unexpected result was the continued decline in clothing and footwear which was reportedly a result of seasonal discounting. Prices in this area have now fallen nearly 2% over the last year, and competitive pressures and a stronger AUD are likely to further this deflationary trend.
RBA Forecasts Remain Intact
Overall the data supports the RBA’s judgement that there will be a gradual increase in underlying inflation over coming quarters. This path is likely to be boosted by the end of mining investment and stronger commodity prices and an increase in nominal growth which should fuel a rise in wage growth alongside a tightening of the labour market.
Speaking shortly after the release of the inflation data, RBA governor Lowe reaffirmed the RBA’s flexible, medium-term inflation target. Lowe suggested that the bank had not lowered rates as much as it would have done if it was looking to push inflation back to target as soon as possible. Lowe also stated that the 2Q inflation reading was in line with the bank’s forecasts. However, Lowe stopped short of indicating that the bank is near to raising rates and instead focused on weak wage growth and the likelihood that it will persist. Referring to the other central banks, Lowe said that the RBA does not need to move “lockstep”.
The sharp breakout in AUDUSD has now stalled at channel resistance. To the downside, the key support level will be a retest of the .7780s – .7830s 2016 high. This is now a key pivot level, and if price holds on a retest of this level, the focus will remain on the upside. The next key resistance will be a test of the .8160s mid-2015 high which is an important level given that the RBA cut rates as price hit that level last time around. The bank continues to warn against further appreciation in the exchange rate, so traders will likely be cautious if the price moves into that area. A breach below the next key resistance will be a test of the .8160s mid-2015 high which is an important level given that the RBA cut rates as price hit that level last time around. The bank continues to warn against further appreciation in the exchange rate, so traders will likely be cautious if the price moves into that area. A breach below the 2016 high is needed to alleviate the near-term upside bias.