Looking at the detail of Q1’13 CPI, inflation does look low — but CPI is very lagged to the cycle, so I’m not convinced it will make the RBA cut in May (though it lowers the bar for an easing); for more on policy see this post.
The rest of this post is a review of the CPI in charts.
CPI was 0.4%q/q in Q1, taking the YoY pace of inflation to 2.5%. That is exactly the mid-point of the RBA’s 2% to 3% band, however (according to the Treasury modeling) there is ~70bps of carbon price in there, so the true pace of inflation is likely to be somewhat lower.
Also muddying things is that Q1 is a seasonally high inflation quarter. Taking out the seasonality puts Q1 CPI at 0.1%q/q (but leaves the YoY pace unchanged).
As has been the case for many years (and should be the case when you have a terms of trade boom) the tradable sector continues to have a deflationary impact on the level of prices. Prices fell 1.2%q/q to be 0.2% lower over the year.
The corollary of this is that the non-tradable sector should inflate. This is also occurring. Non-tradable inflation was 1.3%q/q, to take YoY non-tradable inflation to 4.2%y/y. Again, a good portion of this is the carbon tax. Seasonally adjusting at the aggregate level suggests that non-tradable inflation was ~1%q/q in the quarter. That’s probably a bit too high.
Of course the various exclusion measures are the policy relevant indicators. The RBA’s preferred QoQ measure is the trimmed mean. At 0.3%q/q it is very low. The YoY pace is 2.2%y/y, however about 25bps of that is carbon, so through-the-year core inflation is ~2%. That is also around where inflation for the last two quarters annualised (~1.8%).
An interesting thing is happening to the distribution of inflation. The left hand tail of the distribution is getting stretched out. As a result, the mean is a long way below the median just now. Weighted median CPI was a more ‘normal’ 0.5%q/q in Q1’13, taking the YoY pace to 2.6% (and the 2q AR to ~2.2%).
The problem with these measures is that you cannot explain them to your mum (unless she’s an economist!). The US-style exclusion measure is therefore a handy reference — and at 2.2%y/y (the NSA QoQ was 0.5%q/q) it is basically in line with the median CPI measure.
Looking around the capital cities, I find the split very interesting.
Among the big four capitals, Sydney (the most leveraged, and therefore most sensitive to interest rates) has the highest pace of annual inflation: 2.8%. Brisbane is likely to be the most FX sensitive (due to their exposure to Agriculture, Tourism, and coal mining) and inflation there is 2.1%y/y.
In the minnows, the recession in Tasmania seems to be lowering inflation, with annual inflation of 1% clearly behind the rest of the country (Darwin is a booming 3.8%y/y).