AUSTRALIA: Underlying Inflation Measures Signalling Easing Price Pressures
Jan-30 03:53
The Q4 CPI data showed that underlying inflation is heading towards the RBA’s 2-3% target band printing at 3.2% y/y after 3.6% in Q3. Our PCA core is within the band. But CPI excluding food & energy was elevated at 3.6% y/y but 0.1pp lower than Q3 and core services inflation ticked up 0.1pp to 4.2% y/y. Thus if the RBA begins easing in February, it is likely to be cautious.
- There are a number of different ways to measure underlying inflation – trimmed mean, excluding volatile items such as food and energy, the median. We have another version using principal components analysis (PCA) (based on Bank of Canada research). They are either already within the RBA’s band or heading towards it.
- PCA is useful for when there are a large number of variables, as it finds common patterns that explain most of the variance in the data. In this case, it extracts the common movement in prices and thus creates a measure that reflects underlying developments in inflation and not sector-specific shocks.
- The chart below shows PCA CPI against other inflation measures. It is less volatile, with a standard deviation below that of the trimmed mean. After running ahead of the trimmed mean from 2019 until mid-2021, it was well below in Q4 2024 at 2.7% compared to 3.2% y/y. The gap is narrowing though as it was as wide as 1.5pp in Q4 2022.
- While the median CPI was higher in Q4 at 2.6% y/y up from 1.8%, it was either at the top of the RBA’s band or within through 2024. Also both Q3 and Q4 saw the share of components posting annual growth rates above 3% at 39.1%, the lowest since the Covid-impacted Q4 2021 and below the average since 2000.
Australia underlying inflation measures y/y%
Source: MNI - Market News/Refinitiv
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