Inflation show stopper: Pete Wargent

Whoa, there! It seems that inflation has disappeared into a puff of dust!

 

Nothing like an outlying result to shake things up a bit, and today's Consumer Price Index (CPI) or inflation result for the March quarter was an absolute ripper!

 

Headline inflation printed negative at -0.2 percent. 

 

This was miles below expectations and the second weakest reading in nearly two decades, taking the annual result all the way down to 1.3 percent (which is well below the target inflation range to 2 to 3 percent).

 

The falls were broad based, with six out of the eleven CPI groups recording declines.

More importantly, the "core" analytical series, which strips out outlying readings, notched an extraordinarily soft set of numbers to take the respective annual readings to a record low. 

 

I've diced the data up below to four decimal places, but all you really need to know is that the incredibly weak trimmed mean (0.2 per cent) and weighted median (0.1 per cent) inflation for the quarter have taken the annual readings down to exceptionally low levels at 1.7 per cent and only 1.4 per cent respectively.

 

 

Non-tradables inflation, which is taken to be a reasonable proxy for domestic price pressures, fell to its lowest annual reading since some seventeen years ago in June 1999. 

 

In the normal course of things this sort of result would make an interest rate cut a no-brainer.

 

While markets are suddenly pricing a cut as soon as next week on Budget day as an each-way bet, it would nevertheless still be quite a surprise to see such a change of narrative from the Reserve Bank so soon. 

 

That said many analysts will now see June and August as potentially live meetings for rate cuts, which could take the cash rate down to a record low of just 1.50 per cent.

 

Generally it is said that easy monetary policy brings inflation in time, but if a lack of investment is the underlying problem then it is questionable whether more rate cuts alone will bring this to the party.

 

There isn't space here to run through all of the positive (education, medical services, pharmaceuticals) and negative (fuel, transport, holidays) contributors to inflation this quarter in detail, but we can see that rental growth has slowed to its lowest level since 1994. 

 

As you can see depicted in the chart below, the periods when investors were spooked out of the market (1985 to 1987, and 2008) were also precisely the periods when rents spiked.

Correspondingly the record surge in investor activity since 2012 in response to low interest rates - which Blind Freddy could have predicted - has led to near-record low levels of rental growth.

 

Rampant investor lending has now been successfully stymied so equilibrium should return in due course, as the construction boom also passes its peak. It's always interesting and strangely satisfying when markets work just as they should. 

Rents have continued to rise modestly in most cities through this cycle, but Darwin (-4.4 per cent) and Perth (-4.4 per cent) are in significantly negative territory year-on-year. On the other hand rents kept rising in Sydney by another +2.3 per cent over the year to March.

 

 

Looking instead at annual rental growth we can see how Perth has gone from star pupil straight into detention, and now must work through its elevated vacancy rates before annual rental growth reverts to the mean.

 

 

Rental growth was also negative in Canberra over the year to March (-0.6 per cent) but looks to be heading back into positive territory in the national's capital, while annual rental growth in Hobart increased to 1.4 per cent in the first quarter.

Well, well. A stunningly low inflation result which wrong-footed markets and puts interest rate cuts right back into the frame. Game on.