Rising petrol costs lifts consumer price index

Consumer prices rose more than expected due to a jump in fuel costs, but further RBA rate cuts remain likely.

A big jump in petrol prices lift the CPI in the second quarter.

Australian consumer prices rose slightly more than expected in the second quarter following a big jump in fuel prices, but further interest rate cuts look likely as inflation stays well below target.

The consumer prices index rose by 0.6 per cent in the second quarter and was up 1.6 per cent from a year earlier, the Australian Bureau of Statistics said. Economists had expected the CPI to rise 0.5 per cent in the quarter and 1.5 per cent from a year earlier.

One-off gains in petrol prices, which rose by 10.2 per cent in the quarter, and travel costs boosted the inflation rate.

Trimmed mean inflation, which is favoured by the Reserve Bank of Australia, rose by 0.4 per cent in the quarter and 1.6 per cent on year.

The Aussie dollar spiked to US68.88 cents in the 15 minutes after the data’s release before easing to US68.79 cents by 12.19pm (AEST).

RBA Governor Philip Lowe said last week that it is reasonable to expect an extended period of low interest rates. “On current projections, it will be some time before inflation is comfortably back within the 2-3 per cent target range.”

“It is highly unlikely that we will be contemplating higher interest rates until we are confident that inflation will return to around the midpoint of the target range,” he added.

Mr Lowe’s comments were taken by financial markets as a form of explicit forward guidance aimed at lowering bond yields and pushing the Australian dollar lower.

Indeed.com economist Callam Pickering said while the June CPI figure appeared positive compared with recent results, a closer look suggested Australia’s inflation problem remained dire.

“Unfortunately, the stronger inflation read for the June quarter was largely due to volatile or one-off factors such as the 10 per cent increase in automotive fuel rather than a broad pick-up in inflationary pressures,” Mr Pickering said.

He said the RBA’s decision to cut rates in June and July to a record low 1.0 per cent should help boost inflation, but the adjustments were too late to deliver a meaningful rise during June.

Market expectations of a third consecutive 25-basis point cut in August decreased following the release of today’s data, but economists still expect a reduction to an unprecedented 0.75 per cent by 2020.

Australia’s economy is growing at its slowest pace in a decade as consumer spending has slackened in response to weak wages growth, falling house prices and an uncertain global outlook.

The RBA cut interest rates in June and July, with markets betting at least one more cut is likely before the end of the year.

The inflation data are not expected to see the RBA board rush to cut interest rates at its next meeting in early August, with policy makers taking time to assess the impact of recent easing and income tax cuts delivered at the start of July.

Lower borrowing costs are already adding to momentum in the housing markets with auction activity back at its best levels since in years, while a sharp fall in house prices appears to have bottomed out. That is expected to lift consumer confidence and bolster spending.

Still, stimulus announced since mid-year is unlikely to be enough to propel economic growth at a faster rate, economists said.

All attention is now on the job market, where employment growth has been robust, but a rise in the number of people wanting a job has meant the jobless rate has nudged higher. If the unemployment rate continues to rise, further interest rates cuts look assured.

Dow Jones Newswires, AAP