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CPI (Q1): Core Inflation Falls to Lowest Annual Rate Since Great Depression

The Consumer Price Index (CPI) for Q1 rose just 0.6%, below expectations for a 0.9% rise.

The annual rate is now 1.1%. Core inflation was also soft with the preferred measure, the Trimmed Mean, rising just 0.3% in the quarter and 1.1% over the past year.

Core or underlying inflation attempts capture the inflation trend in the economy. Core inflation is now at its lowest annual rate in almost 100 years, that is, since the Great Depression of the 1930s.

CPI WH

Details

Inflation jumped in Perth (1.4%) and Darwin (2.6%) largely due to government policy changes. Sydney (0.4%) and Melbourne (0.3%) were very low, also partly the result of policy changes.

The inflation ‘pulse’ in Australia remains low at around 1.25% to 1.5% and is looking a long way from the RBA’s target of 2% to 3%. There is nothing in these numbers to encourage the RBA to change their inflation (and policy) views.

The inflation numbers should be treated with caution because:

  1. They are backward-looking and reflect economic conditions and decisions taken in the past.

  2. They are being heavily impacted by government policies and COVID disruptions.

That being said, the ongoing low rate of consumer price inflation does impact inflation expectations and will make it just that little bit harder for employees to argue for a decent wage increase. With inflation just above 1%, to ask for a 3% wage rise implies a big real wage increase that only the most profitable (and generous) businesses will likely pay.

Analysis

The biggest increase in the quarter came from petrol prices, which rose 8.7%. Domestic airfares fell 1.8% helping to push the “Recreation and Culture” group down 0.2% in the quarter.

Otherwise, notable price changes were mostly driven by government policy changes. For example, in Darwin, the Northern Territory Government’s Home Improvement Scheme came to an end. This pushed up the category “Home Maintenance and Repair of Dwellings” by 1.1% and was a big reason that Darwin prices rose 2.6%. There are many examples of these types of policy impacts from electricity prices in Victoria to higher education costs nationally.

Supply chain cost pressures that have emerged over the last year are not showing up in retail prices. Higher transport and logistics costs, delays to deliveries and higher commodity prices all appear to have been absorbed by businesses. This could be explained by strong profitability due to Jobkeeper and strong domestic demand. Business may start to look to pass some of these costs on if they persist.

The next numbers will see the annual inflation rate surge higher as the 1.9% Q2 2020 figure drops out of the calculations. If the quarterly rise in Q2 is 0.5%, the annual rate will jump to 3.6%. This will prove temporary with the annual rate dropping back to 2% by the end of the year.

Bottom Line

Australian inflation could be at a long-term turning point. These numbers have been heavily impacted by Covid disruptions and related government policies. Isolated inflation pressures are emerging in the supply chain and the labour market. On-going strong economic growth and labour demand will need to turn these pressures into a general lift in wages growth if we are to get inflation sustainably higher, as per the RBA’s policy targets.

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