I’ve said over the last couple of weeks that I reckon the December quarter CPI figure (released on 29 January) will be lower than most people think and that we are at the top of the interest rate cycle.
Just as the September CPI surprised everyone by being higher than expected, the December quarter will be lower than expected.
This week’s monthly CPI for October is starting to support my view. Now, I know the monthly CPI figures are a relatively new series release by the Australian Bureau of Statistics and can be a bit volatile, but… they are heading in the right direction.
Consumer prices fall
Consumer prices actually FELL (not slowed) 0.4 per cent in October, the largest monthly decline in prices since September 2020. The annual rate eased to 4.9 per cent – well below the 5.2 per cent most economists were expecting.
AMP Chief economist Shane Oliver has done the maths. If the monthly CPI averages 0.3 per cent in November and December (which is the average of the last three months), then annual inflation will fall to 3 per cent by the December quarter. It will be helped by last November’s 0.9 per cent increase and December’s 1.5 per cent increase dropping out of the annual calculations.
What Shane is saying is that after October’s 0.4 per cent CPI fall and if November and December both rise 0.3 per cent, the December quarter annual CPI will be back to the Reserve Bank’s target range.
An end to rate rises?
That would be pretty incredible and there would certainly be no more rate rises. The question then becomes how long rates will stay at this level before coming down.
In the month of October there were clear signs of goods disinflation (prices dropping). Household furnishings, textiles and equipment, saw large outright price declines. Audio, visual & computer equipment prices continued their downward slide, and the Black Friday and Cyber Monday sales events should mean further declines in November.
Falls in rents, fuel and holiday travel prices were the big surprise. Many expected the increase in the Commonwealth Rent Assistance scheme to weigh on rent inflation, but the impact was much larger than expected.
Fuel and holiday travel are always notoriously volatile items and difficult to forecast. But automotive fuel prices fell by more than the weekly petrol and diesel prices data suggested and holiday travel prices dropped a massive 7 per cent in October.
Services trends still uncertain
One of the things to be wary of with this October monthly figure is that the data skews heavily to prices of good and not so much for services. So, the RBA Governor, Michele Bullock’s focus in her recent speech on prices at hairdressers and dentists, dining out, sporting and other recreational activities don’t get effectively measured until later in the quarter.
CommSec expects the December quarter CPI to come in at 0.9 per cent for an annual rate of 4.4 per cent… but that is still a full 1 per cent below the RBA forecast.
After the shock of the September quarter, it looks like inflation is heading in the right direction.
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