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CPI up less than expected

Headline CPI rose 0.6 per cent in the March quarter, according to the ABS, considerably less than the market expectation of a 0.8 per cent rise.

News Staff Reporter 23 April 2014
— 1 minute read

The most significant price rises this quarter were for tobacco (6.7 per cent), automotive fuel (4.1 per cent), secondary education (6.0 per cent), tertiary education (4.3 per cent), medical and hospital services (1.9 per cent) and pharmaceutical products (6.1 per cent).

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The tobacco price increase was caused by the federal excise tax rise from 1 December 2013 as well as the March 2014 biannual indexation based on the ABS' Average Weekly Ordinary Times Earnings (AWOTE) rate.

These rises were partially offset by falls in furniture (-4.3 per cent), maintenance and repair of motor vehicles (-3.3 per cent), international holiday travel and accommodation (-2.4 per cent) and domestic holiday travel and accommodation (-2.4 per cent).

Westpac economist Justin Smirk said the result will come as a pleasant surprise for the Reserve Bank, given that the RBA had previously implied it expected an increase of around 0.8 to 0.9 per cent for the quarter.

Mr Smirk detailed what the result is likely to mean for the RBA:

1) There will be limited implications for inflation if the Australian dollar eases off back towards US$0.90 from current levels.

2) The economy might not be as strong as they had expected - note that IMF forecasts (largely provided by Treasury) are lower than recent RBA forecasts.

3) There would appear to be little risk in restoring a stronger rhetoric about the Aussie dollar. Recall that following the 0.9 per cent print for core inflation in the December quarter, the Bank dropped its "uncomfortably high" description of the Aussie dollar. The dollar lifted from US$0.87 to near US$0.94 over the subsequent six weeks. (In December, when the Aussie dollar stood at US$0.91, it was described as “uncomfortably high".)

4) We expect that the Aussie dollar will revert back to our US$0.91 target by June but, if that traction is not achieved over the next few weeks, the RBA governor may well restore the "uncomfortably high" language in the statement following the May 6 Board meeting. However, given the more encouraging domestic data on consumer spending, housing and employment it will not restore its easing bias.

The sharp downside surprise in the core inflation reading sparked a quick sell-off of the Australian dollar to around 93 US cents.

CPI up less than expected
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