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Australian CPI Posts Growth in Third Quarter

By Arthur Greene October 26, 2016
Australia

Australia’s consumer price index (CPI) improved in the third quarter, just as so the annual inflation also improved after the central bank eased monetary policy over the summer. Consumer prices rose 0.7% in the third quarter, following a 0.4% increase in April-June, the Reserve Bank of Australia (RBA) said in its quarterly inflation report on Wednesday. The figure beat expectations for an increase of 0.5% and was higher than the 0.4% level reported in the June quarter. According to the Australian Bureau of Statistics, the most significant price rises this quarter are fruit (+19.5 per cent), vegetables (+5.9 per cent), electricity (+5.4 per cent) and tobacco (+2.3 per cent). These rises are partially offset by falls in communication (-2.3 per cent) and fuel (-2.9 per cent).

The rise in fruit and vegetable prices is due to adverse weather conditions, including floods, in major growing areas, impacting supply.

Underlying inflation, of more importance to financial markets given its implications for Australian interest rates, increased by 0.35% for the quarter, leaving the year-on-year rate at 1.5% (without rounding it was 1.54%).

It was the lowest year-on-year increase on record, courtesy of upward revision to the Q2 figure from the Australian Bureau of Statistics.

Economists were looking for a gain of 0.4% for the quarter, and 1.55% increase year-on-year.

In year-on-year terms, core inflation is now running in line with the Reserve Bank of Australia’s year-end forecasts, a factor to consider when looking at its implications for interest rates.

The Reserve Bank of Australia noted there was considerable uncertainty about momentum in the labor market with part-time work having accounted for all of the increase in jobs this year.

The next report on employment is due on Thursday and analysts tip a slight rise in the jobless rate to 5.7 percent.

Conditions in the housing market were mixed too. While turnover and mortgage growth fell from a year ago, prices in Sydney and Melbourne – Australia's most populous cities – continued to escalate.

Australian consumer inflation expectations strengthened this October this being the first time in three months, an early sign that Reserve Bank Australia policy is beginning to stimulate price growth. The Melbourne Institute’s one-year gauge of inflation expectations increased to 3.7% in October from 3.3% the previous month. That was the highest since July.

Australia’s gross domestic product expanded 0.5% in the second quarter, following a 1.1% increase in Q1 which is still the strongest in three years. The country’s outlook remains favorable despite volatile commodity prices and subdued international demand.

About the probability of any further rate cut or any ease further given signs of weakening in Australia’s labour market, here is what Michael Blythe of Commonwealth Bank of Australia had to say;

The main message from the Q3 CPI is that inflation rates remain low and inflation pressures are well contained.

The 0.3% rise in the underlying CPI was a little lower than the consensus forecast of 0.4%, although this was tempered a little by a small upward revision to Q2.

Market pricing and economist’s views have steadily backed away from the idea of a near term Reserve Bank of Australia rate cut, but RBA governor Lowe did note in a recent speech that the Q3 CPI would be an “important update”.

At GMT0300, the AUDUSD pair is trading at 0.7692, with the AUD trading 0.68% higher against the USD from yesterday’s close, after overnight data showed that Australia’s inflation accelerated in the third quarter, easing some pressure on the Reserve Bank of Australia (RBA) to cut interest rate in the next meeting.

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By Arthur Greene October 26, 2016

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