June CPI

We were given the CPI figures by the Bureau on Wednesday.

Headline inflation is running at 3 per cent in the year to June. While this may seem at the upper limit of a healthy economy, it really is not a big deal. The quarterly increase for June is 0.5 per cent, which, simplistically speaking, is roughly equivalent to 2 per cent per annum. The reason why the year to June is so high is that there was a spike in the September 2013 quarter (1.2%), followed by moderate growth in December (0.8%) and March (0.6). The June quarter, then, could be seen as a part of a downward trend (or moderation) over the past year.

The Reserve Bank of Australia won't even flinch at the numbers. While the headline rate is running at 3 per cent, the rate that the RBA looks at is underlying inflation, which excludes categories of goods and services with volatile prices. Underlying inflation for the year to June is 2.8 per cent, which is in the RBA's 2-3 per cent comfort zone. In fact, even if inflation was looking to trend slightly upward, the RBA would be unlikely to act in a hurry, given the upward trend in unemployment (see our post about that here).

What is interesting is which categories are driving our inflation. They are some of the necessities of life: housing (3.9%), health (4.9%), education (5.1%) and alcohol and tobacco (7.1%). These categories, which represent some of the fundamental needs of individuals and families (maybe not so much the smokes and drinks), have been becoming more costly over a sustained period, well above general inflation.

Consumer price index rate, selected categories

Given interest rates have been at a constant low for a significant period, the inflation in housing is a result of increasing rents and growing property prices. While the RBA won't be bothered by inflation more broadly, the heating up of the property market will be starting to weigh on their minds (see our next post later today on this).

Some goods and services have been getting cheaper. The prices of clothing and communications have actually been deflating (-0.6% and -0.3% year to June, respectively), while household goods (furnishings, etc.) and financial services and insurance have been getting cheaper by virtue of running below inflation (both at 1% year to June).

Consumer price index rate, selected categories

The costs of health, education and housing have been climbing ahead of the average rate of inflation for the past decade or more. The chart below shows the higher rates of inflation for these categories compared with the average of all categories. The chart below it shows how these rates have led to spiralling costs over time.

Consumer price index rate, selected categories, 2004-2014

Growth in consumer price index, selected categories, 2004-2014