EXPERT OBSERVER

The Consumer Price Index – the main measure of inflation in Australia – rose by 0.6 per cent in the June quarter, above expectations.

In seasonally adjusted terms the CPI rose by 0.7 per cent. The annual rate of headline inflation lifted from 1.3 per cent to 1.6 per cent. The Aussie dollar rose by almost a quarter of a cent against the greenback in response.

The Reserve Bank monitors three measures to derive the underlying inflation rate. The trimmed mean rose by 0.4 per cent in the June quarter (1.6 per cent annual); the weighted median rose by 0.4 per cent (1.2 per cent annual) and the CPI less volatile items rose by 0.3 per cent (1.5 per cent annual). Overall, underlying inflation rose by around 0.4 per cent in the quarter and by around 1.5 per cent over the year. Market goods and services less volatile items rose by 0.5 per cent in the quarter to be up 1.6 per cent on the year.

Automotive fuel (+10.2 per cent), medical and hospital services (+2.6 per cent) and international holiday travel (+2.7%) recorded the most significant price gains. The most significant offsetting price falls this quarter are fruit (-4.1 per cent), electricity (-1.7 per cent) and domestic travel (-1.5 per cent).

What does it all mean?

- Inflation remains contained. But we can never claim that the inflation dragon is dead, rather resting. Higher fuel prices can be passed through in terms of higher taxi and public transport fares as well as freight and courier prices. Weather events like the current drought in eastern Australia can push up prices of supermarket goods as well as café, restaurant and takeaway food prices. The high activity in infrastructure building can put upward pressure on construction sector wages, in turn lifting prices of newly-built dwellings.   

- Clearly fuel and food prices are volatile. Fuel lifted 10.2 per cent in the June quarter, but over the past month, petrol is down by 3 per cent.

- If we are looking where future inflation pulses can come from, fuel prices, weather events, administered prices (such as utilities and child care), the exchange rate, construction and wages are the things to watch.

- Headline inflation has averaged 1.7 per cent over the past five years and averaged 2.1 per cent over the past decade. So clearly inflation remains below ‘normal’ levels and certainly still below the Reserve Bank’s 2-3 per cent target band.

- The key underlying measures of inflation rose 0.3-0.5 per cent in the June quarter. Even if the latest results were annualised, inflation would be below the Reserve Bank’s 2-3 per cent inflation target.

- Wages are still growing at a slower pace than in the past. But wages are outpacing prices and have lifted from lows. And businesses can’t absorb higher costs forever. The next wage price index data is released on August 14. 

- The Reserve Bank has cut rates in quick succession. At the same time there are indications that economic momentum has improved since the election. The US Federal Reserve is poised to cut rates. So it is opportune that the RBA stays on the interest rate sidelines for now. But with inflation below the target band and likely to remain low, the Reserve Bank can cut rates further if it believed it would be successful in generating faster economic growth, higher wages and lower unemployment. 

CRAIG JAMES is the chief economist at CommSec.