Inflation fell more than expected in June quarter with underlying inflation now 3.6% annualised

26/07/2023 14:00:00

Dr Shane Oliver, Head of Investment Strategy & Chief Economist at AMP, discusses inflation.

Key points:

• The latest quarterly inflation figures confirm that the pace of consumer price inflation is continuing to slow in Australia.
• The quarterly consumer price index rose by 0.8% in the June quarter. This was less than expected with the consensus including ourselves expecting a 1%qoq rise. This was the smallest rise since September quarter 2021 and down from a high of 2.1%qoq in the March quarter last year.
• Annual inflation fell to 6%yoy, from 7% in the March quarter and the peak of 7.8%yoy in the December quarter.
• Underlying measures of inflation also fell but are lagging with the trimmed mean (which is the RBA’s preferred measure of underlying inflation) up by 0.9%qoq or 5.9%yoy (down from 6.6%yoy in the March quarter) (consensus was looking for 6%yoy and we were expecting 5.9%yoy) and the weighed median rose 1%qoq or 5.5%yoy.
• The annual increases in the CPI and underlying inflation were below RBA forecasts for a 6.3%yoy rise in the CPI and 6%yoy rise in the trimmed mean.
• What’s more the quarterly annualised increase in the trimmed mean has now slowed to 3.6% from 7.6% at its September quarter peak.
• The June monthly CPI Indicator slowed further to 5.4%yoy, suggesting a continuing fall in inflation into the September quarter.
• This should all be enough to see the RBA remain on hold next week, but it’s a very close call as the RBA is still likely to be concerned by still high underlying inflation on year on year basis, the still tight jobs market and upside risks to wages growth.
• Either way we have revised down our forecast for the cash rate peak to 4.35% (from 4.6%).

Source: ABS, AMP

Good inflation is continuing to slow as pandemic distortions to demand and supply fade…

Goods price increases slowed to 0.9%qoq, which is the lowest pace of quarterly growth since the March quarter 2021, taking annual growth to 5.8%yoy (well below its peak of 9.6%). High goods inflation led the initial leg-up in prices in 2022 but this is now reversing which is clear across many goods components and is also evident in the US which is further advanced in the disinflation process:

• Clothing and footwear prices rose 0.6%qoq, but this was way less than expected and followed a sharp fall in the March quarter and they are up just 0.3%yoy with earlier than normal sales impacting to some degree
• New dwelling purchase costs for owner-occupiers (which measures the cost of new building) rose by 1% which continues to slow as new demand and supply chain disruptions continue to ease. They are up 7.8%yoy but this is down from 20.7%yoy in the September quarter last year
• Household furnishings and textiles accelerated after post-Christmas discounting but will likely remain affected by lower demand
• Motor vehicle prices fell 0.6%qoq, their first fall since 2020 reflecting easing demand and improving supply
• Auto fuel prices fell by 0.7% due to falling diesel prices
• Food prices are still rising relatively rapidly, being up 1.6%qoq due to higher input costs

Source: ABS, AMP

…but services inflation rose to 6.3%yoy

Services prices slowed to a 0.8%qoq rise but are likely to accelerate again this quarter and annual growth rose to 6.3%yoy which is the fastest since 2001 after the GST was introduced.

• Rents accelerated to a 2.5%qoq increase and are up by 6.7%yoy and a further rise is likely based on newly advertised rents and strong demand from high immigration
• Housing utility prices fell 1.1% with falls in electricity and gas prices, but this will be more than reversed from July with strong increases on the way reflecting the lagged pass through of last years increases in wholesale prices with Government relief only providing a partial relief
• Child care rose 1.5%qoq and personal grooming services rose by 2.2%qoq, but child care will fall from the September quarter as the Federal government has increased the childcare subsidy
• Health prices fell -0.1%qoq as most private health insurers did not increase insurance premiums and there was an increased proportion of people qualifying for pharmaceutical subsidies
• Communication costs fell -0.4%qoq
• Recreation prices fell -0.2% with domestic travel costs down and international travel cost up
• Education prices also fell -0.2% which was partly seasonal and also impacted by NSW and Victorian fee relief
• Insurance and financial services accelerated to 3%qoq%

Rent and utility prices will continue to rise pushing services inflation higher over the next quarter or so and faster wages growth will also impact but it should peak later this year and then follow goods price inflation down as demand cools and the labour market softens.

The breadth of Australian price increases has slowed, with now only 54% of the CPI basket having annualised price increases above 3% per annum, which is similar to the US and below the peak of 70% (although it is still well above normal levels).

This is consistent with the slowing in the underlying measures of inflation.



Source: ABS, AMP

Our Australian Pipeline Inflation Indicator continues to point down

Forward-looking inflation indicators (based on various business surveys, shipping rates and commodity prices) continue to suggest further downside to inflation (see the chart below). And the slowing in goods inflation will likely lead services inflation lower as it has been doing in the US.



Source: Bloomberg, AMP

But will it be enough for the RBA?

Inflation continues to slow in Australia with annual measures continuing to fall from their December peak, quarterly underlying inflation as measured by the trimmed mean slowing to 3.6% annualised (from a peak of 7.6% annualised) and improving supply, slowing demand and falling global inflation pressures point to a further fall in Australian inflation ahead. We now see headline and trimmed mean inflation falling to 3% or just below by mid next year. In our view this should all provide scope for the RBA to remain on hold at its meeting next week.

Unfortunately, though it may not be enough for the RBA which is likely to still be concerned about further upwards pressure on services inflation from rents and power bills, the still tight labour market and upside risks to wages growth posing the risk that inflation will take longer to return to target than it is forecasting.

As such, next week’s RBA meeting is now a very close call. And it could be affected by retail sales data on Friday after which we will finalise our RBA forecast. But we have revised our peak for the cash rate to allow for just one more hike to 4.35% (from 4.6%) and we remain of the view that the RBA has already done more than enough to return inflation to target in a reasonable period.   


Ends

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