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Wednesday, October 24, 2012
Citigroup drops November rate cut
Multiple price hit to essential items forces headline CPI higher. The CPI increased by 1.4% in Q3, the equal largest quarterly price gain in just over six years. It exceeded the market estimate of 1.0% and reflected some combination of the introduction of the carbon tax, an increase in regulated prices, seasonal gains in other prices and supply constraints.
But don’t blame the carbon tax on its own… Although extremely difficult to separate, we do not believe that the carbon tax was a large driver of the CPI. A number of the solid price rises were for essential household items like rents, utilities, food, child-care and hospital and medical services, some of which were due to other forces. For example, the means-testing of the private health insurance rebate scheme, the need to fund investment in utilities assets, higher households insurance premiums and the child care rebate not completely covering an increase in child care price rises. Our analysis prior to the CPI suggested that the carbon tax was not a significant driver of prices outside of utilities. Excluding the housing group that includes utilities, the CPI was still up by a solid 0.9%.
…or seasonality for the bulk of the rise. Rising by 1.2%, this was more than we were expecting at 0.9%. We would be more inclined to dismiss the large headline rise if the gains were seasonal, because this would suggest some correction in coming quarters. In addition, the Q2 seasonally adjusted result was revised slightly higher from 0.6% to 0.7%.
Domestic inflation reaccelerated. Representing roughly 60% of the CPI basket, some of these items can’t be substituted away, as they are driven by essential services. The quarterly gain of 1.8% lifted the yearly reading to 4.0%, masking the slight deceleration in imported inflation, which went from 0.8% to 0.6%. However, on a yearly basis, there is a pick-up in both domestic and imported inflation (Figure 3).
The trimmed mean measure of inflation. Rising by 0.8%, this boosted the equivalent yearly measure to 2.5% from 2.1%. Furthermore, the Q2 result was lifted slightly from 0.6% to 0.7%.
Implications for the RBA. We expect Q4 CPI to moderate from here because we don expect a repeat of some of large price gains. That said, the increase in essential items may present some risk of a pick-up in household cost of living concerns and therefore inflationary expectations. In combination with recent data showing China stabilising, we expect this will strike a cautionary chord from the RBA Board at the November Board meeting. With the October cut yet to be reflected in the data and households and businesses still reacting to the earlier rate cuts, we now believe that the RBA will not cut official interest rates next month.