By Greg Peel

The economists at Westpac suggested earlier in the month that the neutral point with regards to an August rate rise was a headline consumer price increase of 0.8%, but they were predicting 0.9%. This would be enough to push the RBA's trimmed mean measure of the CPI to 3.0% and thus trigger a rate rise.

Westpac had also predicted a 1.0% fall in new housing loans in May but they actually rose 1.9%, thus further cementing the economists' expectation of an August rate rise.

And by this morning, economist consensus for the headline rate had reached 1.0%, which even exceeded Westpac's 0.9% forecast.

The headline CPI measures all changes in consumer prices over the quarter but the RBA prefers to judge the underlying rate of inflation as evidence by its trimmed mean, which omits volatile prices like food and petrol and smooths seasonal factors. In the minutes of its last monetary policy meeting, the RBA noted its expectation that the underlying rate of inflation would probably drift in the June quarter to a trough level post GFC.

In other words, the RBA was indirectly suggesting to the market an August rate rise was unlikely, albeit the point was made that the data – being the CPI – would be crucial.

Well it turns out the RBA was right and economists were well off the mark yet again.

The headline increase in CPI was only 0.6% - down from a 0.9% rise in the March quarter and consistent with the RBA's view underlying inflation was still falling in June. The trimmed mean rose only 0.5% compared to economist consensus of 0.7%. The headline annual rate of inflation thus rose to 3.1% from 2.9% in March, but the trimmed mean actually fell from 3.0% to 2.7%. As this is sufficiently inside the RBA's target zone of 2-3%, there will be no rate rise next Tuesday.

One factor economists thought might tip the balance was the tobacco tax increase instigated in the quarter. But as a counter, many observers have anecdotally noted that stores everywhere are madly discounting stock, and that they were discounting in June ahead of the usual period of “stock take sales” in July. The breakdown numbers in the CPI report tell the tale, with alcohol and tobacco up 8.7% from last year but clothing and footwear, for example, down 3.8%.

As an aside, I recently updated my cable television service and took advantage of a rather heavily promoted “EOFYS” sale. Yet I note that here in the new FY, the same offer is again being advertised without the “EOFYS” get-in-quick warning.

Such examples support what I have been on record as saying often enough lately, being that Australia might be enjoying a renewed mining boom but the rest of the country is quite simply in a recession. Iron ore price rises do not quickly filter back to consumer goods, and that's why the CPI was never going to be a problem – yet.

ANZ economists agree with the “yet”, suggesting the June quarter will indeed be the low point in the inflation cycle. They expect a pick up in the September quarter, a trimmed mean inflation rate of 3.5% by year-end, and two 25 basis point RBA rate rises in the December quarter to 5.0%.

CommSec similarly expects the RBA to now remain “firmly” on hold until at least toward the end of the year. At that point, the economists suggest, strong employment will translate into less reticence to make purchases.

As for Westpac, economist Matthew Hassan called this a “massive downside surprise” on Sky Business after the release.

Economists are easily surprised, central bankers not so.

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