Will Q4 CPI spook the RBA?

As already reported, Australia’s Consumer Price Index (CPI) came in hot at 1.3% in the December quarter – smashing market expectations of a 1.0% rise:

Annual CPI rose to 3.5%, smashing expectations of a 3.0% rise:

Looking at the major components, you can see that the rise in quarterly inflation was driven by Transport (petrol prices) followed by Clothing & footwear and housing (new dwellings):

Over the year, Transport (petrol prices) also drove the inflation, with Housing, Furnishings and Health also posting strong rises:

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 below the headline result at 1.0% and 0.9% respectively over the December quarter. These also beat market expectations of a 0.7% rise:

Over the year, the trimmed mean and weighted median rose by 2.6% and 2.7% respectively. These also smashed market expectations of a 2.4% rise and is smack bang in the middle of the RBA’s inflation target of 2% to 3%:

The higher than expected inflation reading will obviously have the RBA reassessing its guidance that it won’t raise interest rates until 2023.

My view is that the RBA will probably wait for next month’s wage growth data before changing its guidance, as this will show the degree by which inflation is being domestically generated rather than imported.

After all, interest rates are a demand management tool, and there isn’t much point raising rates to counter imported (cost-push) inflation.

Unconventional Economist
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