Inflation seems to have disappeared in a puff of dust

Whoa, there! It seems that inflation has disappeared into a puff of dust!

Nothing like an outlying result to shake things up a bit, and today’s Consumer Price Index (CPI) or inflation result for the March quarter was an absolute ripper!  Consumer Price Index

Headline inflation printed negative at -0.2 per cent.

This was miles below expectations and the second weakest reading in nearly two decades, taking the annual result all the way down to 1.3 per cent (which is well below the target inflation range to 2 to 3 per cent).

The falls were broad based, with six out of the eleven CPI groups recording declines.
All groups CPI


More importantly, the “core” analytical series, which strips out outlying readings, notched an extraordinarily soft set of numbers to take the respective annual readings to a record low.

I’ve diced the data up below to four decimal places, but all you really need to know is that the incredibly weak trimmed mean (0.2 per cent) and weighted median (0.1 per cent) inflation for the quarter have taken the annual readings down to exceptionally low levels at 1.7 per cent and only 1.4 per cent respectively.

CPI Analytical Series

Non-tradables inflation, which is taken to be a reasonable proxy for domestic price pressures, fell to its lowest annual reading since some seventeen years ago in June 1999.

Tradables/Non-tradables CPI

In the normal course of things this sort of result would make an interest rate cut a no-brainer.

While markets are suddenly pricing a cut as soon as next week on Budget day as an each-way bet, it would nevertheless still be quite a surprise to see such a change of narrative from the Reserve Bank so soon. 

That said many analysts will now see June and August as potentially live meetings for rate cuts, which could take the cash rate down to a record low of just 1.50 per cent.

Generally it is said that easy monetary policy brings inflation in time, but if a lack of investment is the underlying problem then it is questionable whether more rate cuts alone will bring this to the party.

Anyway, what a result, and a game-changer, indeed!

Rental growth slowest since 1994

There isn’t space here to run through all of the positive (education, medical services, pharmaceuticals) and negative (fuel, transport, holidays) contributors to inflation this quarter in detail, but we can see that rental growth has slowed to its lowest level since 1994.

As you can see depicted in the chart below, the periods when investors were spooked out of the market (1985 to 1987, and 2008) were also precisely the periods when rents spiked.

Correspondingly the record surge in investor activity since 2012 in response to low interest rates – which Blind Freddy could have predicted – has led to near-record low levels of rental growth.

Rampant investor lending has now been successfully stymied so equilibrium should return in due course, as the construction boom also passes its peak. It’s always interesting and strangely satisfying when markets work just as they should.


Rental growth
Rents have continued to rise modestly in most cities through this cycle, but Darwin (-4.4 per cent) and Perth (-4.4 per cent) are in significantly negative territory year-on-year. On the other hand rents kept rising in Sydney by another +2.3 per cent over the year to March.

Rental CPI Indices

Looking instead at annual rental growth we can see how Perth has gone from star pupil straight into detention, and now must work through its elevated vacancy rates before annual rental growth reverts to the mean.
Housing rents cpi
Rental growth was also negative in Canberra over the year to March (-0.6 per cent) but looks to be heading back into positive territory in the national’s capital, while annual rental growth in Hobart increased to 1.4 per cent in the first quarter.

The wrap

Well, well.

A stunningly low inflation result which wrong-footed markets and puts interest rate cuts right back into the frame.

Game on.



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Pete Wargent is a Chartered Accountant, Chartered Secretary and has a Financial Planning Diploma. He’s achieved financial freedom at the age of 33 - as detailed in his book ‘Get a Financial Grip – A Simple Plan for Financial Freedom’. Pete now manages his investment portfolio, travels and works as a consultant in the finance industry from time to time. Visit his blog

'Inflation seems to have disappeared in a puff of dust' have 2 comments

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    April 30, 2016 @ 2:47 pm George

    Yes interesting times indeed. negative inflation means DEFLATION. This is BAD NEW for borrowers and property investors. It means incomes and prices are declining so relatively speaking your debts are increasing and will take much longer to pay off than initially anticipated (if ever). Negative inflation is the result of artificially low interest rates. Those that rely on savings in bank accounts are seeing their incomes stripped from right beneath them. Its no wonder inflation is going negative. With each and every interest rate cut savers are being slaughtered. Borrowers have started to party until they finally realize the negative impact of low interest rates and negative inflation…The fact that they can no longer rely on inflation to reduce the real value of their debt. No longer can they rely on increasing salaries and rising rents to pay off that mortgage. Yes this is a game changer but much more so that people realize!


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      April 30, 2016 @ 3:43 pm Pete W

      Highly unlikely that YoY core CPI will go -ve, let alone stay -ve


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