Australian Core Inflation Accelerates, Sends Currency Higher

  • Trimmed mean measure rose 0.6% in 4Q, beating 0.5% forecast
  • Tobacco and domestic holiday costs lead price increases

Australia’s core inflation accelerated last quarter, sending the currency higher as the central bank is unlikely to reduce interest rates in coming months.

The Reserve Bank of Australia looks at two core inflation measures -- trimmed mean and weighted median. Wednesday’s report showed:

  • Trimmed mean CPI rose 0.6% QoQ vs. median forecast of 0.5%; it advanced 0.3% in 3Q
  • Weighted median CPI gained 0.5% QoQ, matching median forecast
  • CPI increased 0.4% vs. median forecast of 0.3%

Central bank Governor Glenn Stevens has stood pat since cutting the benchmark rate to a record-low 2 percent in May while the currency has fallen almost 12 percent, boosting the competitiveness of local companies. He’s confident that restrained wage growth, as well as a 23 percent drop in the oil price last quarter, will keep inflation contained even as the labor market improves.

The Australian dollar rose about a third of a U.S. cent following the data and was quoted at 70.34 cents at 12:29 p.m. in Sydney.

Tradable Goods

The report also showed quarterly inflation of 0.5 percent for tradable goods, which are affected by the currency and other international factors, and 0.4 percent for non-tradable goods, which are impacted by domestic variables.

The statistics bureau also released year-on-year numbers for inflation:

  • Trimmed mean CPI rose 2.1%, matching median forecast
  • Weighted median CPI climbed 1.9% vs. forecast 2.1% increase
  • Headline CPI rose 1.7% vs. forecast 1.6% rise

The average of the two core measures was 2 percent, at the bottom end of the RBA’s target.

“It’s at a level that’s low enough for the RBA to consider cutting interest rates, but we’ve also seen a lift in activity indicators and jobs growth recently and we think the RBA will sit pat for the moment,” said Paul Bloxham, chief Australia economist at HSBC Holdings Plc, who previously worked at the central bank. “Inflation is low, but unsurprisingly so.”

Fun Gets Pricier

Today’s report showed the following key headline price gains and losses:

  • Tobacco gained 7.4% QoQ
  • Domestic holiday travel and accommodation climbed 5.9%
  • International holiday travel and accommodation rose 2.4%
  • Automotive fuel fell 5.7%
  • Fruit prices dropped 2.6%

The central bank is trying to kick start a revival in industries outside of mining, where an investment boom is half way through unwinding. The nation’s unemployment rate has fallen to 5.8 percent and the economy recorded its best quarter of jobs growth on record in the final three months of last year. The RBA attributes some of the stronger labor market outcomes to the very low wage gains. 

Still, the economy has expanded below its 30-year average for six of the past seven years.

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