Australian headline inflation falls in Q2 2020, likely to rebound sharply in Q3

Australian inflation collapsed in the second quarter, with headline inflation seeing its largest quarterly fall on record. Today’s data was widely consistent with market expectations. On a quarter-on-quarter basis, the consumer price inflation came in at -1.9 percent, whereas it came in at -0.3 percent on a year-on-year basis.

The fall was mostly driven by the free child care policy and falls in fuel prices, which negatively contributed 1.8 percentage points to the 1.9 percent quarter-on-quarter decline. Excluding pre-school and primary education from CPI, inflation was positive at +0.1 percent quarter-on-quarter. Food and alcohol and tobacco price rises were the largest contributors to inflation in the second quarter, each contributing 0.1 percentage point.

Housing related components of the CPI came in at -0.7 percent quarter-on-quarter, which was the largest fall in more than two decades. Rents dropped 1.3 percent quarter-on-quarter. Given the fall in demand for rental accommodation caused by the pandemic, this fall was not surprising. New dwelling purchase prices measures construction costs for new homes is the largest line item in the CPI basket and it decelerated to 0.1 percent from 0.4 percent in the first quarter.

“With unemployment elevated and a long road to economic recovery, we suspect housing construction will be suppressed for some time. This should see new dwelling purchase prices remain subdued compared to the historic average”, said ANZ in a research report.

Meanwhile, the trimmed mean inflation, which is the RBA’s preferred measure of core prices, dropped to -0.1 percent quarter-on-quarter from 0.5 percent seen in the first quarter.

“Looking forward, Q3 headline inflation is likely to rebound sharply given that free child care policy ended early in the quarter. The real focus for the RBA will be on trimmed mean inflation over the coming quarters. At this stage we think annual trimmed mean inflation will slow further and eventually, likely by early next year, stubbornly low inflation and elevated unemployment will push the RBA to do more. But for now we think this inflation print will largely be looked through by the RBA, which had anticipated a negative annual headline inflation print for Q2 and weak core inflation (albeit not as weak as transpired)”, added ANZ.