Data Snapshot: CPI – Inflation Still Soft

  • Inflation remained weak in the December quarter. Headline inflation rose by 0.5% in the December quarter, which was in line with our expectations. For the year to the December quarter, headline inflation rose to 1.5%, from 1.3% in the year to the September quarter.
  • Underlying inflation, which strips out the effect of volatile items like petrol and food, remained subdued. The average of the two key measures of underlying inflation rose by 0.4% in the December quarter. For the year to the December quarter, underlying CPI rose by 1.6%, up slightly from a record low in underlying inflation of 1.5% in the year to the September quarter.
  • Both the headline and underlying rates of inflation remain well below the RBA’s 2 to 3% per annum target band.
  • Non-tradables inflation lifted to its highest in a year, but has been boosted by the inclusion of tobacco prices into the non-tradables component. As rising taxes have been behind the price hikes in tobacco, it is difficult to interpret the pickup as reflective of increasing domestic price pressures.
  • The RBA’s preferred measures of core inflation suggests that broader price pressures remain subdued. Given spare capacity in the economy, underlying inflation is unlikely to pick up to the RBA’s 2 to 3 percent target band over the medium term as the RBA is expecting.