CPI Remains 1.5%

The headline Consumer Price Index (CPI) remained at an annualised 1.5% for the year-ended September 2015, reflecting Australia’s anaemic economic growth. For the last four quarters, year-end prices have grown less than 2%. Other than the June Quarter of 2015, each quarter has seen low average consumer price increases. Indeed, in September Quarter 2015, prices increased just 0.1% on average. While low, inflation continues to operate within the RBAs targets and is well above the inflation rate in much of the rest of the world.

The recent downwards trend of CPI in Australia is detailed in the chart below.


To go straight to the dashboard and take a closer look at the data, click here.

Australia’s underlying measures of inflation (not the headline rate) are tracking within the RBAs target band of 2% and 3%.

The underlying measures, the Weighted Median and the Trimmed Mean did move lower in the September Quarter. As a result, for the year-ended September 2015, they were respectively 2.1% and 2.2%. This is toward the lower end of the range, but within it, and thus of only limited concern to the RBA. Doubtless this was part of the reason interest rates remained on-hold.

In addition to the headline rate of inflation the RBA tracks a number of other “adjusted” measures of inflation. These include the trimmed mean (defined as the average rate of inflation after “trimming” away a certain percentage of the distribution of price changes at both ends of the distribution), the weighted median and inflation excluding volatile items (which typically include a basket of items such as fruit vegetables and automobile fuel). These are collectively called the underlying level of inflation. As the chart below shows, at present these measures are higher than the headline rate suggesting stronger economic activity than immediately discernible from the data.


To go straight to the dashboard and take a closer look at the data, click here.

Significantly, the inflation rate fell because of weak oil prices and softer utility prices. They are smoothed in the underlying inflation measures. The result is displayed in the chart above.

While the underlying measures show inflation is lower than at almost any time in the last decade, the softness in the economy is not of immediate concern. 

Cheap funds are not the problem – it is the desire by businesses (and banks) to use low interest rates that is the major issue. That is about opportunities, confidence and the preparedness to take entrepreneurial risk. Inflation and interest rates can only work where these factors lead to investment.

In almost all other major economies, interest rates and inflation are lower than in Australia. The Central Banks have used their interest rate levers and found them wanting. Inflation and growth remain sub-optimal. Little wonder the RBA is not keen to pull its own interest rate lever. The good news is that it may not need to use it at all.