WEEKLY E-MAIL

31 July 2017

INFLATION REMAINS WEAK

By Denise Slattery

Australia’s June quarter consumer price index (CPI) once again has come in very subdued.

According to the Australian Bureau of Statistics (ABS), headline inflation rose by 0.2% over the June quarter, leaving it up 1.9% from a year earlier. It was expected to increase by 0.4%, leaving the year-on-year rate at 2.2%.

Core inflation — that which strips out volatile price movements during the quarter and of far more importance in terms of the outlook for monetary policy settings from the RBA — was a little stronger, rising by 0.53%, leaving the year-on-year increase at 1.84%. That was a marginally better than the expected 1.75% from both the Reserve Bank of Australia (RBA) and financial markets.

The ABS said that the most significant price rises for the quarter were for medical and hospital services (4.1%), new dwelling purchase by owner-occupiers (0.9%) and tobacco (1.0%), offsetting weakness in domestic holiday travel and accommodation and automotive fuel which fell by 3.2% and 2.5% respectively.

By capital city, quarterly headline inflation readings ranged from 0% in Perth, Hobart and Darwin to as much as 0.5% in Brisbane. Over the year, inflation increased by over 2% in Sydney, Melbourne, Hobart and Canberra.

This chart shows the core inflation rate slowly crawling back towards the RBA’s inflation target of between 2% – 3%.

Popular economist Shane Oliver, who has previously present to our clients, believes that the below trend growth would indicate that the RBA is likely to leave interest rates at current levels for some time.

Oliver has stated “The Australian economy is still experiencing below-trend growth and spare capacity in the labour market. This ongoing spare capacity means that price growth for goods and services will remain constrained.

While the broad set of activity data has improved in Australia over the second quarter, there are still reasons to remain cautious on growth — unhappy consumers, slowing housing construction and prices and some further drag from mining investment.

We think that below-trend growth and a soft inflation backdrop will keep the Reserve Bank on hold until the end of 2018 or even early 2019, when the improvement in the economy and a rebound in price growth will argue for a start towards the normalisation of interest rates”

Indeed, despite the lift in the core inflation measure, financial markets have reacted to the weakness in the headline rate, briefly driving the Australian dollar back below the 79 cent level.

Denise Slattery
Senior Para-Planner
Authorised Representative No. 304356

If you have any questions or comments, please email me at denise@gfmwealth.com.au

Disclaimer: This document is not an offer or invitation to any person to buy or sell any interest in or deposit funds with any institution. The information here is of a generic nature, and does not take into account your investment objectives or financial needs. No person should act upon this information without firstly seeking competent, professional advice specifically relating to their own particular situation.

Copyright: © This publication is copyright. Subject to the conditions prescribed under the Copyright Act, no part of it may, in any form, or by any means (electronic, mechanical, microcopying, photocopying, recording or otherwise) be reproduced or transmitted without permission. Enquiries should be addressed to GFM Wealth Advisory.