Australia's December quarter CPI confirms that inflation remains benign and that the inflation outlook does not pose an obstacle to further monetary stimulus. The RBA's preferred measures of underlying inflation increased by 0.5%-0.6% during the quarter and are now around 2% higher than a year ago, which is at the bottom end of the RBA's target range of 2%-3%. The disinflation in the underlying measures has persisted now for around two years (see chart).
The 10% plus depreciation of the Australian dollar in the past year is gradually passing through to higher consumer prices, with inflation of tradeables lifting to a year-on-year rate of almost 1%. Considering the scale of A$ deprecation in recent years, the pass through to higher retail prices remains modest probably thanks to intensive competitive pressures amongst retailers and supply chain efficiencies. At the same time, disinflation in non-tradeables remains strong, with the year-on-year rate moderating to sub-2.5%, well below the he peak in 2013 of over 4% (see chart).
The provision of non-tradeables has a high labour content. The disinflation of non-tradeables in recent years is therefore consistent with the moderation in private sector wages growth to a record low since the inception of the series in the late 1990s (see chart). The slowdown in wages growth is at odds with the pick-up in employment growth in the past year. I suspect that an expansion of the supply of labour can reconcile low wages growth and firming labour market conditions.
The Australian economy set to remain in the slow lane in 2016
Mr Glenn Stevens has proven to be a reluctant rate cutter during this prolonged easing cycle. The tame December quarter inflation data are unlikely to sway the RBA board at February 2nd meeting. In the central bank's latest communication about the inflation outlook in November, it expected underlying inflation to remain around 2% over the course of 2016. Today's release would have come in broadly in line with the bank's own forecasts and thus will do little to change that view.
Nor is the renewed turbulence in financial markets of recent months influence the RBA's deliberations. Mr Stevens' has communicated from time to time that he believes that risk premia in financial markets are compressed and that investors are too complacent about risk. He would therefore see the renewed volatility of recent months as a welcome development.
I have long held the view is that more monetary stimulus is necessary to revive the animal spirits in the corporate sector, particularly given that the economy is on the precipice of a capex cliff. The inflation outlook does not represent a hurdle to further rate cuts as is reflected by the RBA's own easing bias. The tame inflation data combined with the slide in global oil prices provides a great opportunity for the central bank to deliver more stimulus at next week's board meeting, and frame a rate cut with a positive narrative.
But the reluctant rate seems to be content with the Australian economy growing at a sub-trend rate for a while longer, and probably wants to see more tangible evidence of a cooling property market before cutting rates again. Although the economy needs more monetary stimulus, my view is that another rate cut won't be forthcoming next week.