Tue Oct 24 19:30:00 CDT 2017

Consensus Actual Previous
Quarter over Quarter 0.8% 0.6% 0.2%
Trimmed mean - Q/Q 0.5% 0.4% 0.5%
Weighted Median - Q/Q 0.4% 0.3% 0.5%
Year over Year 1.8% 1.9%
Trimmed mean - Y/Y 1.8% 1.8%
Weighted Median - Y/Y 1.9% 1.8%

Australia's headline consumer price index rose by 1.8 percent on the year in the three months to September, down slightly from 1.9 percent in the three months to June and below the Reserve Bank of Australia's target range of 2.0 percent to 3.0 percent for the second consecutive quarter. Headline CPI rose 0.6 percent on the quarter, below the consensus forecast of 0.8 percent but up from 0.2 percent in the three months to June.

The small drop in headline inflation in the three months to September reflects larger but offsetting changes in some of the main categories of consumer spending. Prices of food and non-alcoholic beverages fell 0.7 percent on the year in September, down sharply from an increase of 1.9 percent in the three months to June, largely reflecting weaker vegetable prices. Other categories, however, recorded stronger price changes on the year, including housing, up from 2.4 percent to 3.3 percent, transport, up from 2.1 percent to 2.7 percent, and communication, up from minus 3.8 percent to minus 2.9 percent.

Measures of core inflation, which exclude the impact of volatile price changes, were broadly steady last quarter. The trimmed mean CPI inflation measure advanced 0.4 percent on the quarter and was unchanged at 1.8 percent on the year in the three months to September, while the weighted mean CPI inflation measure rose 0.3 percent on the quarter and ticked higher on the year from 1.8 percent to 1.9 percent.

The small decline in headline inflation in the three months to September was largely driven by weaker vegetable prices, with price pressures somewhat stronger for most major categories of consumer spending. This suggests that today's data remain consistent with the RBA's assessment that inflation will likely "pick up gradually as the economy strengthens". Officials' most recent economic outlook, published in August, forecast both headline inflation and underlying inflation at between 1.5 percent and 2.5 percent for the year ended June 2018 and between 2.0 percent and 3.0 percent for the year ended June 2019.

The Consumer Price Index (CPI) is a measure of the average change over time in the prices paid by households for a fixed basket of goods and services. The data are released quarterly. In Australia, the CPI measures the changes in the price of a fixed basket of goods and services, acquired by household consumers who are residents 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.)