The CPI rose by 0.9 per cent in the September quarter, down from 1.6 per cent in the June quarter, giving a headline annual inflation rate of 3.9 per cent, down by just 0.1 of a percentage point from the 4.0 per cent clip posted in the year to June.
The CPI rose by 0.9 per cent in the September quarter, down from 1.6 per cent in the June quarter, giving a headline annual inflation rate of 3.9 per cent, down by just 0.1 of a percentage point from the 4.0 per cent clip posted in the year to June.
Below is an anysis from BankWest's economist Alan Langford.
This in turn was a hefty one full percentage point above the top of the RBA's 2-3 per cent medium-term inflation target.
Quarterly underlying (core) inflation did retreat just a touch in the September quarter, from 0.9 per cent, to 0.8 per cent, but that was not enough to prevent the underlying measure's annual rate hitting the top of the central bank's target at spot on 3 per cent - well, as spot on as an underlying measure can be, that is.
The upshot is you have to be stretching the definition of topping out to breaking point if you were to contend that inflation has peaked as an Australian economy running up against a clutch of capacity constraints traverses its 15th successive year of economic growth since recovering from the recession of the early 1990s.
Not that some parts of Australia may not feel like they are in a recession of sorts. The capital cities of the booming Queensland and WA economies are 'grappling' with headline inflation rates of 4.4 per cent and 4.8 per cent respectively, while inflation rates in Sydney and Melbourne are tracking at a more pedestrian (but in excess of the top of the RBA's target nonetheless) rates of 3.7 per cent and 3.4 per cent respectively. Of the other state capitals, Adelaide and Hobart are, not surprisingly, somewhere in between the resources versus big-two divide.
Inflationary pressures are accelerating across a broad spectrum of the basket of goods and services that make up the CPI, many of which reflect the very supply constraints the RBA has been highlighting for several months. For instance, child care fees rose by 3.3 per cent in the September quarter, even after taking government subsidies into account, which surely can be no better example of a supply constraint relative to booming demand as a robust labour market attracts an ever higher proportion of the working age population.
Food prices rose by 2.3 per cent in the September quarter, and by 9.9 per cent in the year to September. And not only because of bananas, although the price of that seemingly now luxury fruit rose by a further 45 per cent in the September quarter, on top of the 250 per cent rise in the June quarter in the wake of cyclone Larry, way back in March, which devastated most of the nation's crop. Take-away and fast food prices, for instance (after recreational goods, probably about as discretionary as consumption expenditure gets), rose by 0.9 per cent in the quarter, and by 3.8 per cent in the year to September, the fifth quarter in row that annual growth has tracked between 3 and 4 per cent.
And the ABS advises that ... "Increases in distribution and packaging costs were again cited by a number of respondents as contributing to price rises in a number food categories". Hardly evidence of inflation pressures about to peak, you would think - and the RBA probably does, which is really what matters most if you are trying to second guess what the central bank is thinking (and who isn't?).
Implied yields on the most actively traded (March 2007) 90-day bank bill futures contract are another 3 basis points higher today, now having risen by more than 30 basis points since the beginning of the month. The (YIBS) 30-day interbank cash futures market has pushed its assessment of the probability of a November cash rate increase up by around 10 percentage points today, and from less than 50 per cent since just before the new RBA Governor delivered a hawkish inaugural address as the head of the central bank, to 90 per cent.
While the market is right to assign a high probability to a cash rate hike the day after the race that stops the nation, (taking it to an equal six-year high of 6.25% pa), there were not enough red flashing lights in the CPI to justify factoring in a 6.50% pa or higher cyclical cash rate peak just yet, although unless the December quarter CPI shows that underlying inflation has peaked, the approach of next May's pre-election budget will likely underpin active trading in YIBS as the Treasurer's 12th (and still counting) budget draws closer, particularly as it will be unveiled within a couple of weeks of the late April publication of the March quarter 2007 CPI. But plenty can happen between now and then, not least of which is the percolation of the actual August and the prospective November cash rate increases throughout the economy, the latter of which, if it in fact happens, is not without downside risk to the profile of economic growth. But it is a risk that the new Governor is likely to take, lest allowing inflation to gather a significant head of steam requires more aggressive activation of the blunt instrument of monetary policy later rather than sooner.
There is historical (and hardly ancient history at that) precedent for the RBA to ease, rather than tighten monetary policy in the face of
accelerating underlying inflation, which is exactly what occurred in 2001 as the US economy was dipping into recession. However, statements announcing the cuts to the cash rate were littered with references to spare capacity in the local economy, whereas the RBA has no less frequently cited the lack of spare capacity this year as a key factor in its concerns about upside inflation risks.