Wilson HTM Senior Analyst Peter McManus gives his take on the last inflation numbers.
The CPI came in stronger than expected at 0.9% for the quarter to be up 3.6% through the year to the June quarter 2011, compared with a rise of 3.3% through the year to March quarter 2011. The most significant price rises the June quarter were for fruit (+26.9%), automotive fuel (+4.0%), hospital and medical services (+3.4%), furniture (+6.0%) and deposit and loan facilities (+2.1%). The most significant offsetting price falls were for vegetables (–10.3%), audio, visual and computing equipment (–6.3%), electricity (–1.5%), domestic holiday travel and accommodation (–1.5%) and milk (–4.6%).
Fruit prices increased by 26.9% in the June quarter 2011 mainly due to an increase of approximately 138% in the price of bananas due to shortages created by Cyclone Yasi. Banana prices increased 470% over the six months to the June quarter 2011. If we look at the CPI ex volatile items, the rise was a more modest 0.5% for the quarter and 2.4% for the year. Looking at private sector ex volatile items the rise was also a modest 0.5% to be up just 1.8% over the year. (The volatile items are food and petrol prices, the private sector measure exclude utilities etc.)
The RBA measures of underlying inflation also rose 0.9% for the quarter but are runnung at an annual rate of 2.7% -- still within the RBA’s band of 2 -- 3%, but up on last quarter’s 2.2/2.3%.
There is not much raising interest rates can do about food or petrol prices or government charges but the RBA will be concerned that higher inflation expectations might start to feed into wages. The risks have increased of a rate hike in the next couple of months, although we continue to believe the RBA will look through the so-called volatile items and stay its hand, particularly if the debt impasse in the US lingers past 2 August (there have been suggestions that the US government coffers have enough to last a week or two past that “deadline”).
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