Inflation data won’t alter RBA’s interest-rate story

A rate rise this year appears unlikely. But the approximate 50 per cent odds financial markets are pricing in for a rate cut by late 2019 seems overly pessimistic.

The right direction

There is no escaping the disappointment that underlying inflation has run below the RBA’s target of 2-3 per cent for a record three years.

Nevertheless, inflation is slowly travelling in the right direction, a fact that caused currency traders to push up the Australian dollar on Wednesday.

The RBA’s preferred measures of underlying or core inflation, which strip out volatile prices for items such as fuel, were in line with market expectations.

Alex Ellinghausen

RBA governor Philip Lowe is hoping wages and inflation pick up. Alex Ellinghausen / Fairfax Media

The trimmed mean rose 0.4 per cent for the December quarter and 1.8 per cent for 2018. The weighted median came in at 0.4 per cent and 1.7 per cent respectively.

Drought drove up the quarterly price of fruit (+5 per cent) and lamb (+6.8 per cent). The cost of holiday travel (+2.6 per cent) and energy (+0.9 per cent) rose.

Furniture prices increased 1.8 per cent, despite stories of retailers discounting prices before Christmas.

As expected, tobacco costs jumped 9 per cent due to the annual excise tax increase.

Narrative still in play

Falling quarterly petrol prices (-2.5 per cent) subtracted from inflation, as the global oil price plunged. Usually, the RBA looks through volatility in fuel prices if it believes it is merely transitory.

The cost of pharmaceuticals fell 2 per cent.

Headline inflation, which was 0.5 per cent for the quarter and 1.8 per cent at year-end, has been below the central bank’s goal for 15 of the past 17 quarters.

JPMorgan Securities economist Tom Kennedy said there was nothing new in the inflation data that would shift the RBA’s narrative next week.

“The bank has shown itself to be patient with the inflation trajectory, so long as the medium-term forecasts remain consistent with an eventual return to target and improvement can be seen in labour market indicators,” he noted.

The RBA’s Statement on Monetary Policy due on Friday next week will trim its economic growth forecasts, in light of weak September quarter GDP that was revealed in December and anecdotal evidence of a softer economy over summer.

Forecast delay a possibility

The RBA may need to – again – delay its forecast for inflation to hit 2 per cent, most recently forecast to occur in the June 2019 quarter.

Yet positively, unemployment is a low 5 per cent and hiring remains strong.

The wage price index was up a modest 2.3 per cent in the September quarter, equating to real or inflation adjusted wage growth of about 0.5 per cent.

Notwithstanding structural forces restraining inflation, chiefly the globalisation of the labour and goods markets and technology-enabled automation competing against workers, Lowe will probably hold on to the idea that a tightening jobs market will feed through to healthy wage and price pressures – hopefully and eventually.

It would not surprise if Lowe adds caveats to that assessment, to give the RBA wiggle room if the economy materially deteriorates in the next few months.

The risks are obvious but Wednesday’s inflation data won’t alter the RBA’s plans.

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