June CPI – better than feared
June Quarter CPI: Headline 0.6%qtr/3.9%yr; Trimmed Mean 0.8%qtr/3.6%yr. June Monthly CPI: Headline –0.1%mth/3.8%yr, Trimmed Mean 0.3%mth/3.6%yr.
- June quarter CPI rose 0.6%qtr, below both Westpac and market expectations of 0.7%qtr, while annual headline inflation eased to 3.9%yr.
- Trimmed mean inflation printed 0.8%qtr and 3.6%yr, again below our and the market's expectations. The quarterly momentum slowed slightly from the March quarter and we saw the share of items running above 3%yr narrow.
- The June monthly CPI printed –0.1%mth and 3.8%yr. The result was also weaker than we expected as downside risks around holiday travel and seasonal discounting were materialised. The monthly trimmed mean inflation rose 0.3%mth and 3.6%yr.
- While domestic inflation pressures remain elevated, the result was less concerning than feared and reduces the risk of a renewed acceleration in inflation. As such, we no longer expect the RBA to deliver further rate hikes this year.
The CPI rose 0.6% in the June quarter, below both Westpac's forecast and market expectations of 0.7%qtr. As a result, annual headline inflation eased to 3.9%yr. The moderation in headline inflation largely reflected the temporary halving of the fuel excise over the quarter, which saw automotive fuel prices fall –2.1%qtr. Weakness elsewhere was driven by domestic travel and urban transport fares.
The trimmed mean (TM) rose 0.8% in the June quarter, taking the annual pace to 3.6% from 3.5% in the March quarter. This was also below Westpac's forecast and market expectations of 0.9%qtr and 3.7%yr. The quarterly TM pace slowed at the margin, printing at 0.81%qtr in the June quarter versus 0.84% in the March quarter. The result was also below the RBA's profile in its May Statement on Monetary Policy, which had annual TM inflation at 3.8%yr.
Market services excluding volatile items (3mth average) came in at 0.5%qtr and 3.3%yr, with the year-ended pace holding steady from the March quarter.
We also saw a narrowing in the breadth of inflation, with the share of the basket running above 3%yr easing to 42% from 45% in the March quarter and 46% in the December quarter. We also saw the share running below 2%yr tick higher.
Overall, the June quarter data were less concerning than we had anticipated. We highlighted some key risks in our preview – in particular, that holiday travel and areas that see the usual end-of-financial-year discounting could come in weaker-than-expected, with stronger reads for housing and domestic market services being a potential offset. In the event, only the downside risks materialised.
As Chief Economist Luci Ellis detailed earlier today, we no longer expect the RBA to deliver further rate hikes this year. The sizeable pass-through from higher energy costs evident in the early phase of the Middle East conflict has not been sustained, reducing the risk of a renewed inflation acceleration. A November rate hike remains a possibility if inflation surprises to the upside in Q3, but it is no longer our central expectation.
Today’s result suggests downside risks to our broader inflation profile. We had expected some strength in the back half of the year, some of this relating to the ongoing impact from the Middle East conflict, particularly from fertilizer prices, but also the impact of weather events and the higher minimum wage outcome. We will revisit these in an upcoming bulletin once we have processed all the data, accounting for the lower starting point.
June month in more detail (all monthly figures are non-seasonally adjusted unless stated):
The June CPI printed –0.1%mth, below both our forecast and market expectations of 0.4%mth and 0.2%mth, respectively. TM inflation rose 0.3%mth and 3.6%yr, also softer than our forecast of 0.4%mth and 3.7%yr.
The chief culprit behind the decline in the month was automotive fuel, which fell 10.9%mth and subtracted 0.4ppts from headline inflation. Other sources behind the monthly weakness were clothing & footwear, household furnishings, and audio, visual and computing equipment. These saw the usual end-of-financial-year discounting and also eased on a year-on-year basis.
Partly offsetting the above, was a 12.7%mth rise in urban transport fares and a 4.6%mth increase in holiday travel. For the latter, most of this reflected a seasonal increase with domestic travel falling –1.0%mth and international rising 0.3%mth, suggesting conditions here remain benign and are not reflecting earlier pricing pressures from the Middle East conflict.
Market services excluding volatiles and holiday travel was flat in the month, with annual inflation here at 4.4%yr. Insurance was notably weak, with prices falling 0.3%mth and annual inflation easing to 4.9%yr. The softness in the month was somewhat surprising given replacement and repair costs for housing and motor vehicles continue to record solid gains.
In terms of the key surprises:
Upside surprises
- Accessories rose 4.0%mth, well above our 0.4%mth forecast.
- Food inflation was slightly firmer, driven by non-alcoholic beverages (1.0%mth vs –0.6%mth) and dairy (1.3%mth vs 0.1%mth). Takeaway also surprised to the upside (0.6%mth vs 0.0%mth). Partly offseting these was a softer outcome for fruit & vegetables (1.0%mth vs 2.0%mth).
- Spare parts for motor vehicles were up 0.7%mth vs –0.5%mth, while repair costs rose 0.3%mth vs –0.3%mth.
Downside surprises
- Holiday travel was the key downside surprise, rising 4.6%mth vs 8.1%mth.
- Housing was broadly in line in the quarter, though both new dwelling costs (0.4%mth vs 0.7%mth) and rents (0.3%mth vs 0.4%mth) came in slightly softer than expected in June.
- Audio, visual and computing equipment and services fell 1.4%mth, well below our expectation of a 0.1% decline.
- Household textiles fell 2.9%mth, compared with our expectation of a flat outcome.
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