Fin- X Rapid Response August 26 - Australian CPI slows by less than expected

Australian CPI increased by more than anticipated in July. Annual headline CPI slowed by less than anticipated, while the trimmed mean core series held steady. Core wage-related service costs are a problem for the RBA, and the market is pricing a higher chance of a rate rise around the end of the year.

• In monthly terms, headline CPI rose +1.0% in July, reversing June's -0.1% and above the +0.9% expected.

• Headline CPI rose +3.5% over the year, down from +3.8% in June, but well above the +3.3% consensus polled by Bloomberg.

• Trimmed mean inflation was unchanged at +3.6% yoy, with a monthly rise of +0.5% versus +0.3% expected.

• The weighted median was +0.4% mom and +3.6% yoy.

• CPI excluding volatile items rose +0.9% mom and +3.7% yoy, and excluding volatile items and holiday travel +0.8% mom and +3.8% yoy - both above headline.

• The largest contributors to annual inflation were Housing (+5.0%), Food and non-alcoholic beverages (+3.2%) and Recreation and culture (+2.6%).

• Rachael McCririck, ABS head of price statistics, said: "Housing rose by [+5.0% yoy] due to rising costs for New dwellings. New dwellings prices rose +5.7% in the 12 months to July as builders passed on higher costs for materials and labour."

• Rents were steady at +3.6% yoy, and Electricity +6.1% yoy, notably down from +22.4% yoy in June on the timing of last year's Commonwealth and State rebate payments. Electricity costs fell -1.6% in July.

• Transport inflation jumped to +1.6% yoy from +0.1% yoy in June, and rose +2.6% mom. Ms McCririck said: "On a monthly basis, Automotive fuel prices rose +7.5 in July after falling for three months in a row. This was driven by higher world oil prices and the partial unwinding of the federal government's fuel excise relief measures in July."

• Goods inflation was +3.2% yoy (+1.3% mom) and Services +3.7% yoy (+0.7% mom).

• Tradables rose +1.7% yoy (+1.5% mom) while Non-tradables rose +4.4% yoy (+0.8% mom).

• Discretionary: +3.1% yoy and Non-discretionary: +3.7% yoy.

• S&P/ASX200 9,147 -0.2%, AUDUSD 0.7180 +0.24%, Aus 2yr 4.62% +4bps, Aus 10yr 5.03% +1bp

Fin-X Capital Group View

• The good news in this report is that CPI inflation is slowing. Fuel costs increased as expected after the end of the government subsidies, but housing costs were helped lower as the effects of electricity rebates rolled off.

• Yesterday's RBA minutes confirmed that the Monetary Policy Board remains focused on the positive output gap and evidence of capacity constraints in domestic services. In that regard, the July reading was a little more problematic, particularly because the trimmed mean, services, and non-tradables all indicated that prices in this area are proving sticky.

• Domestic, wage-linked services are the persistent core of the problem. Meals out and takeaway (+4.5% yoy), Childcare (+7.3% yoy), Medical and hospital services (+4.9% yoy), Secondary education (+6.6% yoy) and Hairdressing (+4.4% yoy) are all running above the current CPI rate.

• They are also mostly running above the +4.75% July increase in minimum wage awards, suggesting that the administrative change is not the only factor, leading the MPB to infer capacity issues.

• We don't think that the RBA should raise rates. Discretionary spending at +3.1% yoy is already very close to the upper limit of the target band. The higher rate of non-discretionary inflation at +3.7% yoy is already squeezing household budgets, and it's unclear whether an interest rate rise would have much effect on demand in this area. Moreover, the Australian dollar has strengthened, and the price rises in goods and tradables are decelerating, which should weigh on services, albeit with a lag.

• However, the governor delivered a deliberately hawkish message after the last meeting. With that in mind, it's natural to conclude that the chances of a policy response are still reasonably high. The market has moved to price in a roughly 70% chance of a rate increase by the end of February.

Disclaimer​

The contents of this communication is prepared by Fin-X Capital Group Pty Ltd (A.C.N. 627 650 293; AFSL 520526). Any advice contained in this communication is general advice and does not take into consideration your personal objectives, goals, needs and financial situation. You should therefore not rely on the information contained in this email to make any investment decisions without first consulting an investment professional such as your financial adviser. Where there is any reference to specific products, you should obtain the relevant Product Disclosure Statement(s) and familiarise yourself prior to making a financial decision. Any unauthorised use of this communication is prohibited. This email (including any attachments) is intended only for the addressee, it may contain information of a privileged and confidential nature. If you are not the addressee of this communication, you must not copy, reproduce, disseminate or use this email and its contents. If this communication has been received in error by you, please inform us immediately and securely delete. Email transmissions cannot be guaranteed to be secure or error free, as such we do not accept any liability for any errors or omissions.