Only a statistician or an economist could love the December Consumer Price Index.

No matter where you look in the release for the December quarter’s CPI, released by the Australian Bureau of Statistics, there were winners and losers.

In fact, the early reactions to the figures told the usual story: rate rise looms, CPI rises more than expected (well, big deal, 0.5% vs. economists’ forecasts of 0.4%).

Winners however could be found in that the headline rate of inflation in the quarter halved to 0.5% from 1.0% in the September quarter. Losers because the annual rate of the CPI jumped to 2.1% from the 1.3% annual rate in the 12 months to September.

And why did the annual rate rise in the December quarter? Because the December quarter of 2008 saw inflation fall 0.3% as the impact of the credit crunch and falling oil prices outweighed the impact of the higher dollar. That dropped out of the comparison for the December 2009 quarter.

But the annual rate fell from 3.7% in the December, 2008 quarter, to 2.1% in the three months to last December, and safely inside the Reserve Bank’s target range of 2%-to 3% over time.

We all know that’s the so-called headline rate: the rate the RBA looks at are the weighted median and the trimmed mean, and the rates of price pressures in those measures remain well outside the RBA’s range.

The Weighted Mean rose at an annual 3.6% (down from 3.7% in the year to September, while the annual Trimmed Mean was unchanged at 3.2%. But on a quarter to quarter bases, the Trimmed Mean eased to 0.6%, from 0.8%, while the Weighted Mean eased to 0.7%, from 0.8%, which was slightly better news.

But as any economist or analyst and they will tell you that the RBA just love their own measures, which have been computed with greater underlying certainty than the headline rate.

Now the fact that there was a small improvement in the RBA’s own measures won’t stop a rate rise next Tuesday. It’s about what the central bank has been tipping now in its post meeting commentaries.

So what drove the headline rate in the latest quarter? The ABS said the “most significant price rises this quarter were for fruit (+15.9%), domestic holiday travel and accommodation (+6.6%), house purchase (+1.0%), rents (+1.0%) and beer (+2.1%)” while the “most significant offsetting price falls were automotive fuel (-2.8%), audio, visual and computing equipment (-7.1%) and pharmaceuticals (-5.3%).”

Based on our every day lives, higher costs of food like fruit hurt, as do higher housing costs (where higher state government charges for water etc play a role). Beer costs rose because of the lingering impact of excise increases and moves by Fosters and Lion Nathan to sneak up some beer prices. But the Christmas ham and bacon were cheaper in the December quarter.

Car costs fell because (mainly of lower petrol prices. Lower prices from the January 1 tariff cut should show up in the current first half of this year’s CPI). Pharmaceuticals fell and while they are essential, they don’t feed and clothe you. The ABS said:

All groups level, the CPI rose in all capital cities this quarter, with the exception of Darwin which fell 0.1%. Among the cities recording a positive movement, Sydney, Melbourne, Perth and Hobart registered the highest increase with a rise of 0.6%, while all other cities were in the range of 0.3% to 0.4%.

The food group recorded the largest positive contribution in all cities with the exception of Perth and Darwin which had food as the second and fourth highest positive contributors respectively. The most significant contributor was the increase in fruit prices across all cities, most notably in Sydney and Canberra. Darwin recorded a much lower than average rise for the food group.

At the eight capital cities level the housing group was the second highest positive contributor to the quarterly movement showing increases in all cities. The most significant contributor was the increase in house purchase prices across all capital cities, most notably in Melbourne and Sydney.

The recreation group was also a significant contributor to the quarterly movement showing increases in all cities, with the exception of Darwin (-2.7%). This was mainly due to domestic holiday travel and accommodation which recorded rises in seven cities, particularly in Hobart. Darwin recorded an offsetting decrease due to a fall for domestic and overseas holiday travel and accommodation.

The transportation group was the largest negative contributor with falls in all cities, with the exception of Hobart (+0.3%). This was mainly due to the impact of price decreases for automotive fuel with a fall in seven cities. The biggest drop in the transportation group was in Darwin which recorded the largest fall for motor vehicles.

The health group was the second largest negative contributor with falls in all cities ranging from -0.6% in Perth and Canberra to -1.4% in Brisbane and Hobart, with pharmaceuticals the most significant contributor.

But the real story can be found from the RBA’s own inflation measures which attempt to catch the extent to which previous price pressures are remaining in the system Thanks to higher Government charges over the year for water, power, sewerage (and higher local and Federal Government charges as well), these cost pressures are still there. The strength of the Australian dollar helped offset these continuing pressures in the produce price indexes for the December quarter.

With cost pressures in the so-called non-tradables sector (government charges and prices set in the Australian domestic market) rising faster than tradable prices (prices set in the wider global market), the RBA remains worried that cost pressures that should have been ground out of the system by a recession in 2009, weren’t and will help boost costs faster as economic growth accelerates in the coming year.

That’s why the RBA will go on lifting rates, not because of the headline CPI, but because these non tradable price rises are providing  a higher base for other costs to grow from.

Peter Fray

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