By Isaac Gross
Australia’s headline inflation rate climbed to an annual rate of 4 percent in August, up from 3.5 percent, giving the Reserve Bank some vindication for its decision to raise interest rates a day before the figures were released.
But beneath that headline, the case for another hike was less clear. Underlying inflation, which strips out volatile items, remained steady at 3.6 percent over the year.
The Australian Bureau of Statistics said higher petrol prices helped drive the increase.
But annual price pressures were hardly confined to the bowser: housing costs rose 5.7 percent due to rising construction costs, education was up 4.7 percent, and food and non-alcoholic beverages rose 3 percent over the year to August.
The RBA had to make an early call
When trying to save a penalty kick in soccer, a goalkeeper cannot simply wait to see exactly where the ball is going. By then it will be too late. They generally have to commit to diving left or right, before the kicker has made contact with the ball. Choose correctly and they can be a hero. Choose wrongly and they can be left sprawled on the grass as the ball sails into the opposite corner.
The RBA found itself in much the same position on Tuesday. Its interest rate decision was due one day before the Bureau of Statistics released the August inflation figures.
The central bank had to figure out if it should raise interest rates before the ABS kicked the inflation numbers online.
The RBA decided to hike interest rates for the fourth time this year, assuming inflation would remain strong when the new figures were totted up by the ABS.
And that decision was mostly vindicated.
Fuel prices are still elevated
A large part of the increase in prices during August came from petrol. Automotive fuel prices surged almost 15 percent in a single month, largely reflecting higher global oil prices due to the conflict in the Middle East and the unwinding of the government’s remaining fuel-excise relief.
Volatility in petrol prices is not uncommon. In fact it is one reason why central banks often ignore changes in energy prices, as even a sharp increase in one month can just as easily reverse itself a month or two later.
What the RBA worries about more is whether those initial price increases spread through the rest of the economy and become a persistent rise in the prices of domestically produced goods and services.
On those measures, the August figures were less alarming. Once volatile components such as petrol and fresh food are stripped out, prices were flat across the month.
Underlying inflation was steady
Measures designed to capture domestically generated price pressures also showed substantially less momentum than the headline figure would suggest.
The RBA’s preferred measure of underlying inflation, the trimmed mean inflation rate, also moderated in August. The trimmed mean effectively strips out the unusually large price increases and falls each month to provide a better indication of the underlying trend.
Annual trimmed-mean inflation was unchanged at 3.6 percent in August: still uncomfortably above the RBA’s 2–3 percent target, but importantly, no higher than it had been in June and July.
One swallow does not make a summer. A steady underlying reading beneath the headline numbers is nowhere near enough to declare Australia’s inflation problem solved.
But nor does a headline inflation rate of 4 percent necessarily mean underlying inflation has suddenly taken another turn for the worse.
For the RBA, that distinction could be enough to justify some patience.
Isaac Gross is a Lecturer in Economics at Monash University. This article was first published by The Conversation
