Australia Returns to Inflation as Free Child Care Concludes
Pedestrians walk along the promenade at Balmoral Beach in Sydney. (Photographer: Brendon Thorne/Bloomberg)

Australia Returns to Inflation as Free Child Care Concludes

Australia’s consumers prices rose slightly faster than forecast in the three months through September, reflecting a rebound in childcare and fuel prices, but remained well-short of the central bank’s goal.

The annual consumer price index rose 0.7% from the second quarter, compared with economists estimates of a 0.6% gain, data from the Australian Bureau of Statistics showed Wednesday. Quarterly CPI jumped 1.6%, rebounding from a negative result three months earlier.

“There is likely to be further volatility in prices, as the full impact of the pandemic and re-opening of the economy feeds through,” said Sarah Hunter, chief economist for BIS Oxford Economics. “But stripping these out, it is clear that the underlying trend for inflation remains very subdued.”

Australia Returns to Inflation as Free Child Care Concludes

Australia’s economy was divided during the June-to-September period as the states relaxed restrictions at varied speeds. Victoria meanwhile returned to harsh lockdown as a renewed outbreak spread throughout the state. The Reserve Bank of Australia is expected to inject further monetary stimulus into the economy next week as Victoria finally reopens.

Australia Returns to Inflation as Free Child Care Concludes

The central bank has adjusted its inflation framework to allow the economy to run a little hotter. Governor Philip Lowe, in a speech earlier this month, said the central bank wouldn’t tighten policy until actual inflation was sustainably inside its target, rather than just forecast to return there as was previously the case.

What Bloomberg’s Economists Say

“There’s little sign of enduring inflationary pressures in Australia’s economy. The rebound in prices in 3Q was only partial, reflecting the rise in oil prices, removal of temporary policy supports, tobacco tax increases, and some impacts from supply disruptions which will gradually ease. Once these transitory factors will subside what remains is an economy facing a major disinflationary tide flowing from significant labor market slack which we think will require additional an policy response.”

James McIntyre, economist

Today’s report showed the trimmed-mean gauge, a key core measure, gained 0.4% from the second quarter for an annual increase of 1.2%, compared with forecast gains of 0.3% and 1.1%, respectively. The RBA targets inflation of 2%-3% and has struggled to achieve the lower level of that band for most of the past half-decade.

The Australian dollar was little changed after the release, and traded at 71.31 U.S. cents at 1:13 p.m. in Sydney. It climbed almost 4% in the third quarter, extending a rebound from its March nadir of around 55 cents at the peak of Covid uncertainty.

Australia Returns to Inflation as Free Child Care Concludes

Tradables prices, which are typically impacted by the currency and global factors, rose 1.4% in the third quarter from the previous three months. Non-tradables, which are largely affected by domestic variables like utilities and rents, advanced 1.6%.

Other details in the report include:

  • Child care was the most significant rise -- contributing 0.9 percentage points to the headline CPI quarterly movement -- following the end of free child care on July 13
  • Automotive fuel rose 9.4%, due to a recovery in world oil consumption
  • International holiday travel and accommodation and domestic holiday travel and accommodation were both imputed off the headline CPI

The report highlighted the impact of the wild swings in spending, with demand for homewares and household appliances clear as the price of furniture climbed 6.4% on the quarter and household appliances 5.3%, Hunter said.

On the other hand, “after stockpiling in the early days of the pandemic, less demand for household products such as toilet roll has resulted in retailers re-introducing discounting, which in turn has pushed prices for this category down 4.1%,” she said.

The weighted median gauge, another core inflation measure, rose 0.3% in the quarter for an annual increase of 1.3%, matching estimates.

Australia recorded deflation in the second quarter as a combination of free childcare during the pandemic and an oil price drop sent the index into negative territory for only the third time in series history.

The RBA in March cut the cash rate to 0.25% and set the same target for the three-year bond yield, a combination designed to reassure households that rates would remain low for an extended period. It also established a lending program for banks to lower borrowing costs, a program that was subsequently expanded in September.

The central bank, at Tuesday’s meeting, is expected to cut the cash rate and yield target to 0.10% and potentially announce an expanded bond-buying program.

©2020 Bloomberg L.P.

BQ Install

Bloomberg Quint

Add BloombergQuint App to Home screen.