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Inflation Worm Finally Looks to Have Turned

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2023-04-26

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Consumer inflation at both the headline and core level cooled in the March quarter - an outcome that has added to the belief that the Reserve Bank will not lift rates at its May policy meeting next Tuesday.

The core measure is the RBA’s preferred measure and data from the Australian Bureau of Statistics showed it rose at an annual 6.6% rate, while the headline rate was 7%, down from 7.8% in the three months to December.

The core or trimmed median rate eased from 6.9% in the December quarter but if you add in the other core measure, the weighted median, the outcome was a lower reading of 6.2%, down from 6.4%.

On a quarter-on-quarter basis, the headline rate was up 1.4%, also down on the higher 1.9% rise in the final three months of 2022 and well under the most recent peak of 2.1% in the first quarter of last year.

On a monthly basis the fall in inflation was more noticeable, falling from the peak rate of 8.4% rate in December to 6.3% in March.

The Australian Bureau of Statistics pointed out that services inflation saw its highest quarter reading of 6.1% since 2001 - which was influenced back then by the impact of the new GST.

The Bureau said services inflation was driven higher by higher prices for holiday travel, medical services (both seasonal), rents and restaurant meals.

Goods annual inflation eased after two years of steady increases, from 9.5% to 7.6% due to discounting on furniture, appliances and clothes in the March quarter and lower petrol and diesel prices.

Michelle Marquardt, ABS head of prices statistics, said "CPI inflation slowed in the March quarter, with the quarterly rise being the lowest since December 2021. While prices continued to rise for most goods and services, many of these increases were smaller than they have been in recent quarters.”

She said the most significant contributors to this quarter's rise "were medical and hospital services (+4.2 per cent), tertiary education (+9.7 per cent), gas and other household fuels (+14.3 per cent) and domestic holiday travel and accommodation (+4.7 per cent)."

"Prices for medical and hospital services typically rise in the March quarter as GPs and other health service providers review their consultation fees, and the Medicare Safety Net is reset at the start of the calendar year. This year some private health insurance premiums also increased in January, adding to the price rise for medical and hospital services," said Ms Marquardt.

"Tertiary education fees are also indexed at the start of the year. This quarter additional strength was seen in tertiary education as changes in student contribution bands and fees introduced in 2021 as part of the Jobs-ready Graduates Package continued to flow through to the index.”

"Price reviews reflecting higher wholesale gas prices led to rises in gas and other household fuels, with rises seen across all eight capital cities and the strongest rise recorded in Melbourne (+22.7 per cent).

"This quarter's rise was notable as prices increased in all eight capital cities, whereas typically only Melbourne's prices are reviewed in the March quarter," said Ms Marquardt. Higher prices reflected major events over the past year including the ongoing war in Ukraine and unplanned outages at coal fired power stations.

There was strong demand for holiday travel over the school holiday period and the return of major events to some capital cities resulted in price rises for domestic accommodation. These increases were partially offset by small price falls for domestic airfares following significant price rises in recent quarters.

"Food prices (+1.6 per cent) continued to rise, driven by fruit and vegetables (+2.4 per cent) and snacks and confectionary (+4.1 per cent). "Potato shortages due to wet weather in key growing regions late last year led to price rises for both potato crisps and frozen potato products, while higher edible oil and packaging prices also contributed to the rise for a range of snack products," said Ms Marquardt.

"Fruit prices rose due to damaging weather in apple and avocado growing regions late in 2022, as well as typical seasonal rises for apples and citrus.”

Partially offsetting the rise was international holiday travel and accommodation (-8.2 per cent), as some destinations entered their off-peak seasons following significant rises in recent quarters.

Discounting activity by retailers resulted in falls across furniture (-4.6 per cent), major and small appliances (-3.8 per cent and -3.6 per cent) and clothing (-3.2 per cent).

The big drivers across the 12 months were new dwellings (+12.7 per cent), domestic holiday travel and accommodation (+25.0 per cent) and electricity (+15.5 per cent) the most significant contributors.

The only factor that might see the RBA lift rates next Tuesday would be the continuing strength of the jobs market, but weak wages growth will not make that a convincing argument on its own.

The easing in inflation in the March quarter and month by month tells us that getting it back to the 2% to 3% will be a slow process, unless the economy turns turtle and goes bottoms up into a recession.

The Reserve Bank started hiking interest a year ago next month and after 10 consecutive raises, it decided to hold steady at 3.6% at its April policy meeting

In recent communications (The minutes of the April meeting predominantly), the bank made it clear it is prepared to hike again if the incoming data undermines its pathway to returning inflation back within its 2%-3% target.

Nothing released since then qualifies as a rate rise driver.

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