Energy costs are a major factor driving underlying inflation.
Australia’s CPI inflation surged to an annualized 5.1% in the first quarter of this year and analysis by the Australian Bureau of Statistics shows that many of the energy factors driving the CPI are also impacting underlying inflation, which is now at 3.7%.
Underlying inflation is the Reserve Bank of Australia’s preferred measure of inflation and at 3.7% it is now well above the RBA’s 2% to 3% target range, see: MNI BRIEF: Australian Inflation At 5.1% Pressures RBA On Rates.
This is the highest level of underlying inflation since 2009 and the first time it has been above the RBA’s target since 2015, firming the likelihood of a June rise in official interest rates from the current record low of 0.10%.
The Australian dollar added US1 cent to US72 cents on Wednesday after the data was released.
ENERGY AND TRANSPORT
In commentary and data provided to MNI, the ABS CPI team point out that while a 13.7% quarterly increase in transport costs was the largest factor in driving the CPI this was “predominantly driven by fuel - +35.1% (annually), however motor vehicles (+6.6%) also contributed to the rise.”
Motor vehicles are included in underlying inflation and items impacted by the higher price of fuel, such as meat categories, fruit and the price of petrol and other fuels were also included in calculating the 3.7% quarterly increase in underlying inflation.
Other categories included in underlying inflation and influenced by transport costs which rose sharply were postal services, household appliances, cleaning and maintenance products and milk.
POLICY REVIEW, MPS AHEAD
The data provided by the ABS shows how increases in CPI inflation are impacting on underlying inflation which has now well exceeded the last RBA forecast made in February.
In the February Monetary Policy Statement the RBA forecast underlying inflation at 3.25% in June, and then forecast a fall back to 2.75% by the end of the year as what it saw then as temporary factors receded.
The next MPS is due on May 6, after the next RBA board meeting on May 3, and is likely to include significant upward revisions on the inflation forecasts.