Australian Q4 2014 CPI was released earlier on this morning with consumer prices rising 0.2% in the three months to December. The reading, the softest seen since Q4 2012, was below expectations for an increase of 0.3% and left the annual rate at +1.7%, the weakest level seen since Q2 2012.
Looking at item-specific groupings 8 of 11 recorded increases in the 12 months to December with Alcohol and Tobacco, courtesy of higher taxes, leading the way with a gain of 7.4%. Elsewhere education costs rose by 5.2%, healthcare 4.4% with housing rounding off the four-largest percentage gainers with an increase of 2.4%. Three groups recorded deflation with the largest coming from communications which fell 3.0%.
Turning to core inflation, the preferred measure of inflationary pressures used by the RBA, prices increased by 0.7% on quarter, well above the 0.5% gain expected, although, with weaker data rolling off the series and revisions to earlier data the annual rate slowed to 2.25% from 2.55% in Q3. Although some 0.05% higher than what the market had been expecting the annual figure was the lowest recorded since Q3 2012 and remains very much in the lower-half of the RBA’s target band.
So what are the implications for RBA monetary policy moving forward? Does the hotter-than-expected core print really slam the door shut on further rate cuts as I’ve read elsewhere this afternoon? Maybe, the markets have stripped out the potential for a near-term cut in February to just 11% from 38% prior to the release, but it’s simply too soon to rule out the potential for further easing in the months ahead. Certainly there’s no wage inflation pressures, the 1.7% annual CPI rate, along with unemployment sitting at decade highs, means we’re more likely to see wage disinflation accelerate rather than diminish over the course of 2015. And yes, while there some positive effects unfolding in the housing market, higher prices for existing housing is encouraging construction activity and helping to boost household wealth, counteracting those forces are uncertainty surrounding the outlook for business investment and impact of ongoing falls in our key commodity markets. While some point to the rapid fall in the AUDUSD exchange rate as something that could see tradable inflation rise strongly in 2015, it did fall more than 8% over the course of 2014, in trade-weighted terms it was down only 3% over the same period. Is a 3% decline compared to those witnessed in commodity markets going to really spur a tradable-led inflation surge? Possibly, but it’s unlikely. So with non-tradable and tradable inflation likely to remain weak, unemployment at decade highs, GDP growth below trend and business and consumer confidence subdued, will keeping monetary policy steady assist economic rebalancing process? My views are pretty clear, I’ll leave it up to you as to whether or not you think it will. While the RBA will be pleased with the recent depreciation in the AUD, something that they’ve sighted on numerous occasions to assist economic rebalancing, their inaction in 2014 may come back to haunt them come 6am tomorrow morning. Should the US FOMC lay the groundwork for a slower and shallower tightening schedule the first beneficiary of such a decision will be the high-yielding, AAA-rated Australian Dollar.
For all those interested in reading the full ABS release please follow the link provided: