Inflation edges higher on fuel and medical, but childcare costs fall

| 31.07,19. 06:21 PM |


Inflation edges higher on fuel and medical, but childcare costs fall




Photo: Petrol prices fell significantly at the start of the year, but have since rebounded. (ABC News: Alistair Kroie/Nicole Mills)

A spike in fuel prices and medical costs has delivered a slightly higher than expected bounce in inflation over the June quarter, easing the pressure on the Reserve Bank to cuts interest rates again immediately.


The Consumer Price Index (CPI) rose 0.6 per cent over the quarter to be up 1.6 per cent for the year.


Core inflation — an average of the trimmed mean and weighted median measures and regarded as the RBA's preferred measure — came in at 1.4 per cent over the year, the same as the first quarter reading and the weakest reading since the series started in 2003.


It is also the 14th consecutive quarter core inflation has come in below the Reserve Bank's 2-3 per cent target band.


But, despite price rises being subdued overall, there were some big losers over the past quarter.


Those losers included motorists, people seeking medical treatment or taking overseas holidays, and smokers.


Motorists were especially hard hit over the past few months, after enjoying cheaper fuel over summer.


"Automotive fuel prices rose 10.2 per cent in the June quarter 2019," ABS chief economist Bruce Hockman said.


"This rise had a significant impact on the CPI, contributing half of the 0.6 per cent rise this quarter.


"Automotive fuel prices returned to levels recorded in late 2018 after falling 8.7 per cent in the March quarter 2019."


However, domestic holidays were cheaper during autumn and the first month of winter (-1.5pc), as were fresh fruit and vegetables (-2.8 per cent) and electricity charges (-1.7 per cent).


Working parents with small children have also saved a substantial amount of money over the past year, with child care costs falling due to policy changes.


"Through the year, utility prices have fallen 0.2 per cent and child care has fallen 7.9 per cent following the introduction of the Child Care Subsidy package in July 2018," Mr Hockman observed.


Housing costs fall for first time in 20 years


There was also unusually good news for both home owners and renters with ABS noting that housing costs recorded their first quarterly fall in more than 20 years, down 0.2 per cent, although they are up 0.5 per cent over the year.


The move is significant given housing costs have the largest weight in the CPI.


The ABS cited "lower electricity and gas prices, weak housing market conditions and increasing rental vacancy rates in some capital cities" as the key factors behind the fall.


"The downturn in the housing market is clearly affecting the CPI, with housing-related components expected to be an ongoing drag on inflation in coming quarters," NAB's Kieran Davies said.



Further rate cuts delayed


However, the good news for parents and energy users means that borrowers may have to wait a little longer to see any further reduction in the interest rate on their loans.


Given the recent comments from RBA governor Philip Lowe that a flexible inflation targeting framework did not require inflation to be within the target range at all times, the data, while weak again, does not necessarily increase the pressure on the RBA for another cut at the upcoming August 6 board meeting.


"We do not think a slightly softer than expected outcome would trigger the RBA to cut interest rates more aggressively," Bank of America Merrill Lynch economist Tony Morriss said.


NAB's Keiran Davies said the RBA is now unlikely to alter its immediate view on where inflation is heading.


"We expect the board to remain on hold at 1 per cent in August, and to continue to signal a willingness to do more if needed," Mr Davies said.


"We still expect the bank to cut rates again by November, after it receives more information on the labour market, growth and the initial impact of both the Government's tax refunds and the June/July rate cuts."


Low inflation still pointing to problems


Indeed economist Callam Pickering was not so upbeat on the data, arguing low inflation points to deep underlying problems in the economy.


"At first glance the latest set of inflation figures seem positive, at least compared with recent poor results, but a peak behind the curtain reveals that Australia's inflation problem remains dire," he said.


"Problems such as low wage growth and high rates of underutilisation that have persisted for a number of years.


"The RBA has already cut rates twice this year, bringing rates to just 1 per cent, to address these issues. We expect more will need to be done and anticipate a two further cuts over the next 12 months."


Embed: Inflation vs RBA target band
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