AU: CPI


Tue Jan 27 18:30:00 CST 2015

Consensus Actual Previous
Quarter over Quarter 0.3% 0.2% 0.5%
Year over Year 1.8% 1.7% 2.3%
Trimmed mean - Q/Q 0.5% 0.7% 0.4%
Weighted Median - Q/Q 0.5% 0.7% 0.6%
Trimmed mean - Y/Y 2.2% 2.5%
Weighted Median - Y/Y 2.3% 2.6%

Highlights
December quarter consumer prices were up 0.2 percent on the quarter after increasing 0.5 percent in the September quarter. On the year, the CPI was up 1.7 percent after increasing 2.3 percent in the prior quarter. The annual increase of 1.7 percent is below the Reserve Bank of Australia's target range of 2 percent to 3 percent and will not be an impediment should the Bank decide to lower it policy interest rate when it meets next week.

The RBA's preferred measures, the trimmed mean and weighted mean were both up 0.7 percent on the quarter and up 2.2 percent and 2.3 percent respectively just above the RBA's target floor.

The most significant price increases were for domestic holiday travel & accommodation (5.8 percent), tobacco (4.8 percent) and new dwelling purchase by owner-occupiers (1.1 percent). The increases were partially offset by a decline in automotive fuel (down 6.8 percent). Global oil markets continue to experience oversupply, which resulted in continued declines in oil prices. In Australia, average unleaded petrol prices reached a low of $1.17 per litre in December 2014, the lowest recorded average daily price since February 2009.

Definition
The CPI is a measure of the average change over time in the prices paid by households for a fixed basket of goods and services. In Australia, the CPI measures the changes in the price of a fixed basket of goods and services, acquired by household consumers who are resident in the eight State/Territory capital cities. (Darwin, Perth, Sydney, Melbourne, Hobart, Brisbane, Canberra and Adelaide)

Description
The consumer price index is the most widely followed indicator of inflation. An investor who understands how inflation influences the markets will benefit over those investors that do not understand the impact. In countries such as the Australia, where monetary policy decisions rest on the central bank's inflation target, the rate of inflation directly affects all interest rates charged to business and the consumer.

Inflation is an increase in the overall prices of goods and services. The relationship between inflation and interest rates is the key to understanding how indicators such as the CPI influence the markets - and your investments. Inflation (along with various risks) basically explains how interest rates are set on everything from your mortgage and auto loans to Treasury bills, notes and bonds. As the rate of inflation changes and as expectations on inflation change, the markets adjust interest rates. The effect ripples across stocks, bonds, commodities, and your portfolio, often in a dramatic fashion.

By tracking inflation, whether high or low, rising or falling, investors can anticipate how different types of investments will perform. Over the long run, the bond market will rally (fall) when increases in the CPI are small (large). The equity market rallies with the bond market because low inflation promises low interest rates and is good for profits.

Unlike most other countries, Australia calculates its CPI on a quarterly basis. For monetary policy, the Reserve Bank of Australia generally follows the annual change in the consumer price index. It has an inflation target of 2 percent to 3 percent. The RBA also has two preferred core or analytical measures - the weighted and trimmed means. The trimmed mean is a method of averaging that removes a small percentage of the largest and smallest values before calculating the mean. After removing the specified observations, the trimmed mean is found using an arithmetic averaging formula. The weighted mean excludes certain items from the CPI basket (the exclusion approach). Typically, the excluded items are those that are volatile and/or display pronounced seasonal patterns, and those that are subject to administrative price setting.

Currency traders prefer healthy growth and higher interest rates. Both lead to increased demand for a local currency. However, inflationary pressures put pressure on a currency regardless of growth. For example, if the Australian Bureau of Statistics reports that the consumer price index has risen more than the RBA's 2 percent to 3 percent inflation target, demand for the Australian dollar could decline. Similarly, when the RBA lowers interest rates, the currency weakens. (Currency traders also watch the interest rate spread between countries.)