Australian inflation remains weak in Q2; RBA likely to cut rate in August

Australia’s inflation in the second quarter of 2016 came in weak. The consumer price index rose 0.4 percent on a sequential basis in the June quarter, following a fall of 0.2 percent in the first quarter, according to the Australia Bureau of Statistics. The June quarter data was broadly consistent with market expectations. Meanwhile, the average of the two underlying measures was up 0.5 percent quarter-on-quarter and 1.5 percent year-on-year. On an annual basis, June quarter’s CPI rose 1 percent, the weakest annual rise since the second quarter of 1999.

CPI, excluding volatiles, was up 0.3 percent on quarter-on-quarter basis and 1.6 percent year-on-year. The headline inflation, on a six month-end annualized basis is only 0.4 percent, whereas underlying is 1.4 percent.

In the June quarter, prices of footwear and clothing surprised on the upside. Prices were up 2 percent on a sequential basis. Meanwhile, prices of new dwelling purchase rebounded rising 0.9 percent quarter-on-quarter following two subdued results. Prices recovered along the eastern seaboard. Prices of petrol increased 5.9 percent quarter-on-quarter, contributing more than 0.1 percentage points to overall CPI in the second quarter. Weak prices were broadly based with only 33 percent of the CPI basket with annualized price gains over 2.5 percent, said ANZ in a research note.

Meanwhile, non-tradables inflation rose 0.4 percent, the fourth straight quarter rise. Significantly, domestic market services inflation slowed further. The year-on-year figure decelerated to 0.9 percent in the second quarter from 1.1 percent in the first quarter.

Tradables inflation in the first quarter was up 0.6 percent on sequential basis, as compared with the decline of 1.4 percent in the first quarter. However, on a year-ended basis, tradable inflation was flat. Tradables prices excluding volatiles were quite flat in the second quarter. Continuous pressure on retail margins is likely to continue to subdue price pressures in this sector, noted ANZ.

In all, subdued wage growth continues to hit, whereas competitive pressures and margin compression continue to be a drag on tradable inflation. These trends are expected to continue implying a subdued inflation profile in the next 12 to 18 months, according to ANZ.

“On balance, we continue to favour a rate cut at the 2 August RBA policy meeting. Rates markets have responded to the CPI with an adjustment in the OIS pricing for the next few RBA meetings of around 5bp. This takes the likelihood of an August cut to just over 50%”, added ANZ.