CPI in detail: No smoking gun to lift rates

As noted earlier, Australia’s Consumer Price Index (CPI) came in at 0.8% in the June quarter – slightly above market expectations of a 0.7% rise:

Quarterly CPI

Rebounding after last June’s heavy fall.

Annual CPI surged 3.8% in Q2. However, this rise was driven by the ‘base effect’, since CPI fell by 3.7% in the corresponding Q2 quarter of 2020 (as shown above).

Annual CPI

Big rise on the ‘base effect’.

Looking at the major components, you can see that the rise in quarterly inflation was driven by Transport (petrol prices) followed by Health:

The most important part of this release is actually the ABS’ ‘analytical series’, which provides alternative measures of underlying inflation in the economy. These measures – namely the trimmed mean and weighted median – aim not to measure the size of inflation (which is captured by the headline figure), but the breadth of price inflation across the basket of consumer goods and services.

The purpose of these underlying measures is to exclude unusually large price movements (in both directions) of just a few of the subgroups, which may have quite an impact on the headline CPI. By excluding these outliers, you can get a feel for how widespread across the consumer basket inflation really is (see here for further details).

It is this underlying inflation that the RBA watches most closely in setting interest rates.

According to the ABS, the trimmed mean and weighted median measures came in way below the headline result at 0.5% respectively over the June quarter:

Quarterly underlying inflation

Underlying inflation muted.

Over the year, the trimmed mean and weighted median rose by only 1.6% and 1.7% respectively – well below the RBA’s inflation target of 2% to 3%:

Underlying inflation

No inflation smoking gun.

Based on this data, the RBA will be in no rush to lift interest rates.

Unconventional Economist
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