The ABS has
just announced the release of a new seasonal-adjustment methodology to its measures of inflation. I have not examined this in great detail, but the short-strokes summary seems to be an upward revision to core inflation in Q4 last year (from 0.4% to 0.55%), the same core inflation estimate in Q1 this year (ie, 0.85%) and a substantial
downward revision to core inflation in Q2 this year to 0.6% (from 0.9%) with the RBA's preferred benchmark, the trimmed mean, falling from 0.9% to 0.7%. The year-on-year numbers for core inflation are similar: the new estimate is +2.55% versus the old of +2.7%. The average core inflation in the first half of 2011 is 2.9% pa, which, while uncomfortably high for the RBA, is quite a bit lower than the previous estimate of 3.4% pa. Interestingly, overall core inflation since 2002 looks to have been a little higher, especially during the pre-GFC period.
Assuming all of this is correct, we can infer two things: the worrying trend of extremely strong core inflation originally reported by the ABS appears not to be as disturbing as first reported; and, if this is the case (and the RBA concurs, which is no given since the RBA and ABS do not always see eye-to-eye on this stuff), there is less of a need to rush off rate hikes, subject, of course, to the Q3 inflation results, which we will get shortly. Put another way, if the ABS reported 0.6% core inflation prior to the August Board Meeting, every economist in Australia would have been calling a no-move. And these adjustments by the ABS further remove the barrier to rate cuts in the event that we need them.
