July 26, 2016 08:30 CDT

Consensus Actual Previous
Quarter over Quarter 0.5% 0.4% -0.2%
Trimmed mean - Q/Q 0.4% 0.5% 0.2%
Weighted Median - Q/Q 0.4% 0.4% 0.1%
Year over Year 1.0% 1.3%
Trimmed mean - Y/Y 1.7% 1.7%
Weighted Median - Y/Y 1.3% 1.4%

Second quarter consumer price index was up 0.4 percent and 1.0 percent from a year ago. The trimmed mean was up 0.5 percent and 1.7 percent while the weighted mean was up 0.4 percent and 1.3 percent on the year. The readings are far below the Reserve Bank of Australia's inflation target range of 2 percent to 3 percent. The data will probably play a key role in influencing whether the Reserve Bank of Australia will cut interest rates at its August 2 meeting.

The most significant price increases in the second quarter were in medical & hospital services (4.2 percent), automotive fuel (5.9 percent) and tobacco (2.1 percent). The increases were partially offset by declines in domestic holiday travel & accommodation (down 3.7 percent), motor vehicles (down 1.3 percent) and telecommunication equipment & services (down 1.5 percent).

The increase in medical & hospital services was driven by the annual increase in Private Health Insurance (PHI) premiums, which rise on 1 April every year. The increase for automotive fuel follows three consecutive quarterly declines.

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)

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.)