Australian Inflationary Outlook Softens

Key Points:

• Australian Headline CPI falls to 0.2% q/q.

• Trimmed Mean CPI remains on target at 0.5%.

• Inflation softening likely to only be transitory.

The latest Australian Consumer Price Index (CPI) figures were released earlier today and provided the market with a little surprise, with the headline result declining to 0.2% q/q. This proved to be significantly below the current estimates for inflation with most economists expecting a 0.4% q/q print. Subsequently, the Aussie Dollar has already eased around 30 pips but it remains to be seen what this means for the broader economy.

Certainly, the slip in the Headline CPI figures is interesting but, on its own, it’s not likely to have a great deal of impact on the RBA’s forward direction. In addition, a more important measure, the Trimmed Mean CPI, was actually broadly in line with expectations and returned a result of 0.5% q/q. In fact, this is actually the CPI result that the central bank looks at when they are seeking to set their monetary policy. Subsequently, the view that the recent slip in the headline CPI figure largely removes the pressure for the RBA to act in the medium term is ill-informed.

In fact, the main reason for the slip in the Headline CPI was the overall volatility of petrol and food prices. This largely explains why Core CPI has remained unmoved and, subsequently, suggests that any price effects are expected to be transitory. Subsequently, it would be wise to not read too much into the medium term impacts of a fall in inflation.

However, Australia still faces a challenge with the ongoing rebalancing that is occurring within their economy. Although looser monetary policy has assisted in softening the end of the commodity super cycle there still remains much transition of capital back towards services to occur. Certainly, the recently strength that the AUD has experienced has been relatively unwelcome by the RBA and many have taken the view that the currency is now significantly overvalued.

In fact, many of the reasons for the gain are the ebbing sentiment around the greenback, not the strength of the Australian economy. Subsequently, the AUDUSD is likely to snap lower in due course as broad support for the greenback returns to the fray. This may especially be the case if the market takes a negative view to the current CPI figures, despite the lack of a long-term impact.

Ultimately, the key take away from this commentary is that the slip in the headline CPI rate is relatively unimportant in the scheme of economic variables given that the core inflation rate did not change. However, the current valuation of the Aussie Dollar is more concerning and could be potentially putting a break on export competitiveness that may concern the RBA over the near term.