Australia: Q4 CPI represents a welcome stabilisation of the economy - ANZ

In view of the Jo Masters, Senior Economist at ANZ, today’s Australian inflation data suggest that the sharp disinflationary forces that have been weighing on prices are abating and that inflation is stabilising.

Key Quotes

“Headline CPI was in line with our expectations at 0.5% q/q, while underlying inflation was a touch weaker at 0.4% q/q. This data is consistent with the RBA’s forecast profile and has no immediate policy implication. While the stabilisation in inflation would be welcome, we continue to see inflation running below the policy target band until H2 2017.

• Headline CPI rose by 0.5% q/q in Q4, in line with our expectations. Clothing & footwear and furnishings, household equipment & services continue to be weighed down by retail competition. Fruit & vegetable prices rose a touch, while fuel, tobacco, and domestic airfares all added to headline inflation in the quarter.
• Underlying inflation appears to have stabilised. In six month-end annualised terms, core inflation was 1.7% in Q4 2016, compared with 1.5% in Q2 2016. The average of the two underlying measures rose 0.4% q/q, to be 1.6% higher over the year, while CPI ex volatiles (seasonally adjusted) was a touch weaker, up 0.3% q/q.
• The ANZ diffusion index confirms that inflationary pressures remain soft across a wide range of items, with just 37% of items in the basket rising by more than 2.5% annualised – although this was up from 31% in Q3 2016.
• Tradable prices fell by 0.1% q/q to be just 0.1% higher over the year, despite the lift in petrol prices. This suggests retail price competition remains intense, as evidenced by ongoing weak inflation in clothing and furnishings. Non-tradable prices rose by 0.8% q/q, while domestic market services prices rose by just 0.4% q/q, in line with ongoing weak wage growth.
• The housing group rose by 0.5% q/q, reflecting a very weak 0.1% q/q rise in rental inflation and a 0.5% q/q rise in new dwelling purchase costs.”