Australia: Inflation picture continues to look fairly subdued – NAB

According to the analysts at NAB, the Australian inflation picture remains important for expectations around RBA policy settings, especially with underlying inflation widely anticipated to remain below the RBA’s 23% target band.

Key Quotes

“The Q4 CPI outcome came in on the soft side, but largely aligned with RBA expectations, contributing to the decision to keep the cash rate unchanged at recent Board meetings – although other considerations also played a part in the decision. The broad picture on inflation provided by the Business Survey has not changed a great deal since last quarter. It continues to suggest very muted price pressures across the economy, although some of the measures did pick up modestly.”

“Inflation pressures emanating from the wholesale and retail sectors remain well down on their 2015 peaks, although the former is still well above the average for the other industries. Meanwhile, the retail price index has been much more muted than wholesale, suggesting that either competitive pressures or subdued demand (or both) are stifling their ability to pass on higher costs to consumers at this stage – retail labour costs are also running ahead of prices. There has also been evidence in recent retail sales data from the ABS of heavy discounting, possibly reflecting the closure of certain retail chains.”

“Growth in final product prices rose slightly to 0.7% annualised (was 0.6%) and a 0.2% quarterly rate. Both purchase cost and labour cost inflation are running faster, despite being a little lower in Q1 (at a quarterly rate of 0.2% and 0.4% respectively). Retail price inflation accelerated the most in the quarter (up 0.2 ppts), while mining and transport prices slowed the most (both down 0.2 ppts). In levels terms, wholesale price inflation was strongest in the quarter (0.4%), followed by personal services prices (0.3%). In contrast, transport price inflation was weakest at -0.1%. Looking forward, inflation expectations for the next 3 months are broadly steady, pointing to very subdued price pressures persisting, with final price inflation expected to be at around an annualised rate of 1% (0% for retail inflation).”

“Even though input costs are still growing faster than final prices, firms are now reporting much better profit margins than they have for a number of years – although the index is still in negative territory. Mining, wholesale and FPB services were the only industries to report a non-negative margins index in Q1 2017. Retail is still seeing the worst profit margins despite a lift in prices during the quarter.”