Our take on the latest Consumers price index (Fri 16 Jul 2021)
Inflation up 3.3%pa
Largest quarterly jump since GFC (ex. GST hike)
OCR to rise at least 25bp next month
The key numbers...
- Headline inflation was 3.3%pa in June, with the quarterly increase in the consumers price index of 1.3% being the largest quarterly jump since the Global Financial Crisis (excluding the GST rise in late 2010).
- Inflation was much stronger than both market expectations of 2.8%pa and the Reserve Bank’s forecast of 2.6%pa in the May Monetary Policy Statement.
- Transport prices rose 2.2% in the June quarter to sit 9.4%pa higher than a year ago. A lot of this rise is because of a 16% recovery in petrol prices over the last year, although used car prices are also sitting a whopping 14%pa higher.
- Other key consumer prices that are considerably stronger than a year ago are clothing and footwear (up 4.9%pa), housing and household utilities (up 3.9%), and household contents and services (up 3.7%).
- The tradable component of GDP shot up 1.7% from the March quarter, suggesting we are importing a fair amount of this inflation, and was stronger than the non-tradable component, which grew 1.2%.
- Goods prices were up 2.0% from the March quarter and 3.5% from a year ago, but this price spike is unsurprising considering the bottlenecks on imports we have seen in recent months. This quarterly jump was considerably higher than services inflation, where prices were up 0.4% from the March quarter and 3.1% from a year ago.
CPI components
Annual % changes
...and our reaction
- The annual inflation rate has now surged out of the Reserve Bank’s 1-3%pa target range. Although the June 2020 quarter was artificially low due to restricted demand and the effects of free usage of public transport and some other civic amenities, the 1.3% quarterly jump still indicates that price pressures have intensified significantly.
- The movement in the components of the CPI confirms the idea that supply issues are a major driver of inflation in the June quarter. However, the breadth of price rises across all major categories suggests that strong demand side is exacerbating upward pressure on prices.
- The Reserve Bank announced on July 14 that it is halting quantitative easing by the end of next week, and that monetary policy is now into a tightening cycle. The extreme strength of GDP growth, inflation, and other economic indicators over the last few weeks makes an official cash rate rise next month a near certainty, and today’s data means there is a chance that the Bank could even lift rates by 50 basis points.
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