AU: CPI


Tue Apr 21 20:30:00 CDT 2015

Consensus Actual Previous
Quarter over Quarter 0.2% 0.2% 0.2%
Year over Year 1.3% 1.3% 1.7%
Trimmed mean - Q/Q 0.5% 0.6% 0.7%
Weighted Median - Q/Q 0.5% 0.6% 0.7%
Trimmed mean - Y/Y 2.3% 2.2%
Weighted Median - Y/Y 2.4% 2.3%

Highlights
As expected the consumer price index was up 0.2 percent for a second consecutive quarter. When compared with the same quarter a year ago, the CPI was up 1.3 percent after an increase of 1.7 percent in the December 2014 quarter. The increase is well within the inflation comfort zone of the Reserve Bank of Australia. The RBA has an inflation target range of 2 percent to 3 percent. In minutes released earlier this week, the RBA held off a change in the policy rate as they waited for more economic data and especially price data.

The most significant price increases this quarter were in domestic holiday travel & accommodation (3.5 percent), tertiary education (5.7 percent) and medical & hospital services (2.2 percent), These increases were partially offset by declines in automotive fuel (down 12.2 percent) and fruit (down 8.0 percent). The decrease in fuel was registered in all fuel types with the quarterly drop the largest since December 2008. Over the twelve months to March 2015, automotive fuel has decreased by 22.5 percent -- the largest yearly fall in the history of the series, beginning in September 1973.

The RBA's preferred measure of inflation -- the trimmed mean which strips out volatile items -- was up 0.6 percent and 2.3 percent on the year while the weighted median was up 0.6 percent and 2.4 percent.

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.)