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Low CPI indicates RBA interest rate may remain steady

In the September quarter, the Consumer Price Index (CPI) rose by only 0.4% which could indicate the official cash rate could remain steady for a little longer, reports St George in their latest Data Snapshot.

 

With regards to the Reserve Bank of Australia (RBA), the figures that are most relevant are the underlying inflation numbers; the trimmed mean and weighted median numbers. These average of these two measures only rose by 0.3% for the quarter which is the smallest increase since the 2016 March quarter.

 

The annual rate of underlying inflation dropped to 1.7% in the September quarter, down from 1.8% in the June quarter. This is the lowest pace in the past eighteen months.

 

The RBA has a target underlying inflation range of between 2-3% per annum, and the latest results show inflation remains low (1.7% for September quarter). St George Senior Economist, Jo Horton believes this target band will not be reached in the medium term which will allow the RBA to keep interest rates at bay. 

 

“Inflation is expected to remains subdued due to ongoing spare capacity in the labour market, slow wage growth and the competition in the retail sector. Low inflation will allow the RBA to leave interest rates unchanged for an extended period.”

 

Affecting the CPI was prices for child care which have dropped by 11.8% and telecommunications equipment and services which dropped by 1.5%. The Government’s new Child Care Subsidy scheme was introduced in this quarter which resulted in child care prices being driven down.

 

Drivers for price increases for the quarter were international holiday travel & accommodation (4.3%) which were partly due to seasonal price increases for peak season, domestic holiday travel & accommodation (2.4%), tobacco (1.8%) which was the result federal government excise tax for tobacco, and automotive fuel (1.4%) which was the result of higher oil prices.

 

For the year to September high price increases were recorded for:

  • Automotive fuel (20.8%)
  • Tobacco (14.0%)
  • Postal services (10.6%)
  • Domestic holiday travel & accommodation (7.4%).

Offsetting the above was declines in:

  • Audio, visual & computing equipment (-9.0%)
  • Childcare (-8.5%). 

 

Westpac Chief Economist Bill Evans told the Property Observer in 2017 that too thinks rate will remain steady.  

 

"We remain comfortable with our view that rates will remain on hold for the remainder of 2017 and 2018," said Mr. Evans. 

 

 

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