Record CPI figure comes almost as a relief

Annual CPI inflation hit its highest ever annual rate of 6.1% in the June quarter and while a record, it was less than many in the markets had forecast.

The Australian Bureau of Statistics said the rise in the Consumer Price Index was mainly due to higher dwelling construction costs and automotive fuel prices.

And while high, the annual rate was a long way from the 9.1% annual figure for the US, 8.6% for the EU, 8.2% for the UK and 7.3% for New Zealand.

Annual trimmed mean inflation (a measure of core cost increases and which excludes large price rises and falls), rose to 4.9%, the highest since the ABS first published the series in 2003 but again that is well short of underlying or core measures from other countries.

Trimmed mean inflation was up from 3.7% in the year to March while the headline rate was up from the 5.1% reading in the March year.

The weighted median, a second core measure, rose an annual 4.2%, slightly less than expected but still up from 3% in the year to March.

The Australian dollar fell to 69.22 US cents and ASX trimmed losses following the 11.30am release and ended up by a small amount at the close.

Australian government bonds rose in price, with three-year yields losing as much as nine basis points to 2.95%. The 10-year yield was down four basis points to 3.30% as investors though the rise took some of the pressure off the Reserve Bank ahead of its rate setting meeting next Tuesday.

“This is a very strong inflation print, but it is likely a shade below the RBA’s expectations,” said Sean Langcake, head of macroeconomic forecasting for BIS Oxford Economics.

“There is limited evidence of a breakout in wage-driven inflation in these data, with volatile and imported goods accounting for much of the quarterly increase.”

While the CPI won’t stop a rate rise from the RBA next week it has choked off speculation of a heavy handed 0.75% rise and perhaps will even force the bank’s board to question the need for a much-tipped rise of 0.50%.

Quarter on quarter the CPI rose 1.8% down from the record 2.1% in the March quarter but was still the second highest quarter on quarter rise.

The most significant contributors to the rise in the June quarter CPI were new dwellings (+5.6%) and automotive fuel (+4.2%). Of these, rate rises will impact home building costs by forcing a slowdown (which is already underway anyway in home construction and renovations).

A contributor to the surge in home building costs was the Homebuilder grants scheme to first home buyers in 2020 and 2021. Those grants are still being doled out, though at a reduced pace.

The Reserve Bank can’t really influence the cost of petrol or diesel but there is already evidence from oil majors that the surge in petrol prices has already see a cut in demand from motorists who are buying less petrol.

“Shortages of building supplies and labour, high freight costs and ongoing high levels of construction activity continued to contribute to price rises for newly built dwellings. Fewer grant payments made this quarter from the Federal Government’s HomeBuilder program and similar state-based housing construction programs also contributed to the rise,” said Head of Prices Statistics at the ABS, Michelle Marquardt,

“The CPI’s automotive fuel series reached a record level for the fourth consecutive quarter. Fuel prices rose strongly over May and June, following a fall in April due to the fuel excise cut.”

That excise cut will be restored in September and will offset any fall in market prices in late September and in the December quarter.

Reflecting the supply chain problems and the impact of higher energy input costs for business, the ABS pointed out that the price of goods (up 2.6%) continued to rise more strongly than that of services (+0.6%).

Notable rises were recorded across the food group (+2.0% and thanks to the floods and heavy rains along the East Coast and the surge in prices of grains and oilseeds after the invasion of Ukraine) and the furnishings, household equipment and services group (+2.5%).

Main contributors to the rise in food prices included vegetables (+7.3%), meals out and takeaway foods (+1.4%), and fruit (+3.7%). All flood and rain related, along with higher wheat and flour prices.

The ABS said that supply chain disruptions due to flooding, labour shortages (mostly caused by Covid), and rising freight costs also contributed to higher prices.

Furniture prices rose 7% thanks to increased transport and material costs, and stock shortages.

The smaller rise in services was due to a 1.2% rise in financial services (rising interest rates and fees), and a 2.3% rise in travel and accommodation costs as demand rose from more tourism (Flight centre’s modest update this week attests to the emerging recovery in travel).

Child care costs fell 7.3% fell as the full effect of additional child care subsidies for families with two or more children under the age of 6, which started in early March, flowed through into this quarter. Before and after school care vouchers offered by the NSW Government also contributed to the fall in child care costs.

Like in the June quarter., the ABS said the drivers for the 6.1% annual rate were a 20.3% jump in new building costs and 32.1% surge in the cost of automotive fuels.

That 20.3% rise in new building costs was also a record and the highest recorded since the series commenced in 1999, according to the ABS.

Trimmed mean inflation increased 1.5% over the quarter and 4.9% over the year – the latter was up from 3.7% in the year to March.

“Annual trimmed mean inflation was the highest since the series commenced in 2003 and annual goods inflation was the highest since 1987, as the impacts of supply disruptions, rising shipping costs and other global and domestic inflationary factors flowed through the economy,” said Ms Marquardt.