Following my headline post on the CPI, reader PeteFaulkner rightly pointed out that I made no reference to the September quarter revision to the trimmed mean. Here it is from the ABS:
In the December quarter 2011, the All groups CPI, seasonally adjusted rose 0.2%, compared with the original All groups CPI recording no change. The trimmed mean rose 0.6% in the December quarter 2011, compared to a revised rise of 0.4% in the September quarter 2011. Over the twelve months to the December quarter 2011, the trimmed mean rose 2.6% compared to a revised rise of 2.4% over the twelve months to the September quarter 2011.
The weighted median rose 0.5% in the December quarter 2011, compared to a revised rise of 0.4% in the September quarter 2011. Over the twelve months to the December quarter 2011, the weighted median rose 2.6% compared to a revised rise of 2.7% over the twelve months to the September quarter 2011.
Currency markets rallied on the CPI announcement so they are perhaps looking past the headline weakness and seeing potential complications for monetary policy in the trimmed mean.
If they are, they’re are wrong. Westpac had the following to say:
As we highlighted in our preview, the risks to our (and the market) forecast for a 0.2%qtr rise in the CPI were to the downside. In the end, a weaker than expected print on car prices (–1.2%qtr) was the key reason for the softer print. The average of the core measures rose 0.6%qtr as expected.
The fear of many, which was not shared by Westpac, that inflation was about to boil over due to the mining boom MkII has proved to be unfounded.
Headline inflation was flat in the December quarter taking the annual pace down to 3.1%yr from 3.5%yr in Q3 and a recent peak of 3.6%yr in Q2. True part of the moderation was seasonal (food and health are big seasonal negatives in Q4) but the drop off in the annual pace and the 0.2% rise in the seasonally adjusted CPI also highlights the modest inflation outcome.
Compared to our preview, the main surprise in Q4 was in motor vehicles which fell 1.2%qtr vs. our forecast for a more modest 0.2% fall. Most other components were broadly in-line with our expectations and if there was a variation it was, on average, a touch softer than what we were expecting.
An upside surprise was seen in the 7.3%qtr rise in domestic holiday travel & accommodation (we had pencilled in +3.75%qtr) but this was countered to some extent by a 1.9% fall in international holiday travel & accommodation.
The effect of the strong AUD is coming through as the annual pace of tradable inflation dips to 1.8%yr (was 3.3%yr in Q3) compared to a 3.9%y for non-tradable inflation.
The core measures, which are seasonally adjusted and trim out the largest positives and negatives, rose a more modest 0.6%qtr on average (0.5%qtr weighted median, 0.6%qtr for trimmed mean) which saw the annual pace of the average of the core measures rise very slightly to 2.6%yr from 2.5%yr. Core inflation continues to hug the mind point of the RBA inflation target band and the outlook is for it to moderate to the lower end on the band by mid 2012.
Exactly right. Despite the revisions, the core rates of inflation are also set to fall on a weakening labour market and income growth. ANZ also makes the point that:
Six-month annualised underlying inflation also fell sharply to 1.9% in Q4, compared to 3.6% in Q2, despite a 0.1ppt upward revision to Q3 underlying inflation.
…Today’s underlying inflation result was in line with the RBA’s forecast of 2½% y/y. Thus, the RBA will be comfortable that inflation is tracking consistent with its expectations, and it will not need to re-evaluate its forecasts in light of today’s data. The RBA’s forecasts in their early-February Statement on Monetary Policy.
· Today’s CPI release confirms non-concerning inflationary pressures in the Australian economy, with core inflation running in the lower part of the RBA’s 2–3% target band (the six-month annualised result is around 2%). As such, the result gives the RBA room to cut interest rates further, should it desire to provide more support to the domestic economy in the face of global uncertainties and evolving domestic economic conditions. In fact, with inflation very much under control, the RBA’s job now seems to be to set monetary policy to fine tune Australian unemployment outcomes between the conflicting forces of managing the large expansionary mining investment boom currently underway and the concretionary effects emanating from cautious consumers, structural adjustment due to the high AUD, tighter fiscal settings and the drag from European developments.
· At recent Board meetings the RBA has decided that, with the inflation outlook moderating, there has been scope for a more neutral policy to foster sustainable economic growth. Incoming data has supported that decision, with employment effectively flat, unemployment drifting up slightly and considerable uncertainty and volatility in financial markets as a result of the situation in Europe. The latter concerns have eased for markets somewhat over the Christmas / New Year period, removing (at least in the short term) any pressure for extremely aggressive interest rate cuts (though Australia fortunately retains the room to action these if required). Will the Board decide that conditions are sufficiently different to expectations to further cut interest rates in February? We have had a rate cut pencilled in for February, but increasingly feel that is a low-conviction call, with Australian data modest but not disastrous. We expect another rate cut sometime in the next few months, as we expect the Bank to assess that the economy can afford to grow a bit quicker without creating inflation, but increasingly feel a February move may be just a bit early.
If you’re expecting another cut then why not February? Q3 revisions are baked into the cake. 2.6 trimmed mean is well within the RBA’s target band. Current rates of inflation are below the band. They can cut if the economy needs it and it does. So do the banks. Forex markets might just as well be rallying on the prospect of better growth emanating from rate cuts. Let’s face it, right now if you sneeze then the Aussie will fly trying to catch the spray.
My money is still on February and then more.
