Whoa, whoa, boy, haul down the “rate rise looms” flag and run up, the ”finely balanced” pennant, today’s consumer price index figures for the September quarter showed a sharper-than-expected fall in the Reserve Bank’s version of underlying inflation, as well as a drop in the headline rate.

The quarter-on-quarter rate was a rise of 0.7%, for an annual rate of 2.8%. The RBA’s version (trimmed and weighted mean) produced a fall to 2.3% and 2.5% respectively, from the 2.7% reading in the June quarter for both measures.

With growth running at more than 3%, the terms of trade at record levels, unemployment falling, the Australian economy remains in the sweetest of sweet spots for the moment with inflation under control and trending lower.

Combined the two RBA readings average out at 2.35%, which is a noticeable fall from the 2.7% in June and the average of 3.45% for both measures in the September quarter of 2009. What’s amazing is that this slowdown has come despite the gathering strength of the economy, rising interest rates, the flood of cash from our improving terms of trade and rising property prices.

Both RBA measures now sit comfortably under the top end of the bank’s 2%-3% inflation target range (over time), according to the release from the Australian Bureau of Statistics .

And that means the pressure is off the RBA to boost rates solely based on a rise in the inflation rate. There could be other reasons, such as the rising flow of anecdotal reports of cost pressures, labour shortages and delays to mining and resource projects in NSW, WA, Queensland and Bass Strait, but inflation remains under control, and if anything possibly a bit lower than the headline and underlying rates indicate because of the impact of the increased tax on tobacco.

The ABS said the main drivers in the increase were:

“The most significant price rises this quarter were for tobacco (+7.0%), water and sewerage (+12.8%), electricity (+6.0%), property rates and charges (+6.2%) and rents (+1.1%).

“The most significant offsetting price falls were for automotive fuel (-3.7%), vegetables (-5.4%), pharmaceuticals (-3.9%), audio, visual and computing equipment (-2.7%) and soft drinks, waters and juices (-1.8%).”

Strip out the tobacco impact and we probably get a headline rate closer to 2.5%, and underlying about 2.2%.

In the minutes of the October 5 RBA board meeting, when the bank sat on rates, much to the surprise of everyone, especially the banks (no joy from the CPI either for the banks who are still edgy about higher rate rises than normal), the board specified an inflation target for the September quarter of “A year-ended increase of around 3 per cent, with underlying inflation around 2.5%–2.75%, would be consistent with the central forecast scenario,” the minutes read.

And the decision not to lift rates was described a being  “finely balanced” and “The timing of adjustment remained a matter of judgement.” and “While the board recognised that it could not wait indefinitely to see whether risks materialised, members judged that they had the flexibility to do so on this occasion. Overall, they concluded that it would be appropriate to hold the cash rate steady for the time being, pending evaluation of further information at the next meeting.”

Well, the RBA now has the extra information, inflation is not a scary as it looks, retailers and wholesalers must be eating some margin though because the very sharp rise in the various stages of the Producer Price Index for the quarter was much larger than expected, even with the impact of the stronger dollar.

The weak sentiment and sales growth among most retailers is obviously forcing them to keep prices low to try and drive sales momentum.

And this is showing up in comments such as this from the recent JB Hi-Fi AGM, where management said the 12.2% growth rate in sales in the first quarter of the 2011 year was 5% below budget. Woolies same store sales in its huge supermarkets business only rose 2% (Coles were up a stronger 6%, though from a smaller base) and there have been a string of veiled warnings about how sales and profits are “skewing” to the second half or will “rebound” which is shorthand for the current half will see weak numbers.

The ABS said: “At the All groups level, the CPI rose in all capital cities this quarter. The highest positive movement was in Darwin (+1.1%) followed by Brisbane (+1.0%) and Hobart (+1.0%). All other cities increased between 0.5% and 0.9%.

“The housing group was the highest positive contributor in all cities. The highest increases were in Brisbane (+2.8%) and Hobart (+2.8%). All other cities increased between 1.5% and 2.4%. The increases were due to rises across all cities in water and sewerage. Electricity also recorded increases in all cities except Melbourne. The drop in Melbourne was due to the impact of the winter energy concession. Property rates and charges, and rents also increased across all cities.

“Over the 12 months to September quarter 2010, the all groups CPI rose in all capital cities. The highest positive movement was in Melbourne and Perth (+3.1%) due to relatively higher increases in housing, alcohol and tobacco and education in those capital cities. Canberra (+2.1%) recorded the lowest positive movement.”

Peter Fray

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