Tue Jan 30 18:30:00 CST 2018

Consensus Actual Previous
Quarter over Quarter 0.7% 0.6% 0.6%
Trimmed mean - Q/Q 0.5% 0.6% 0.4%
Weighted Median - Q/Q 0.4% 0.4% 0.3%
Year over Year 2.0% 1.9% 1.8%
Trimmed mean - Y/Y 1.8% 1.8%
Weighted Median - Y/Y 2.0% 1.9%

Australia's headline consumer price index rose by 1.9 percent on the year in the three months to December, up from 1.8 percent in the three months to September and below the Reserve Bank of Australia's target range of 2.0 percent to 3.0 percent for the third consecutive quarter. Headline CPI rose 0.6 percent on the quarter, unchanged from the three months to September and just below the consensus forecast of 0.7 percent.

The small increase in headline inflation in December reflects offsetting changes in some of the main categories of consumer spending. Prices of food and non-alcoholic beverages fell 0.2 percent on the year in December, picking up from a decline of 0.7 percent in the three months to September, while the year-on-year change in transport prices increased from 2.7 percent to 3.3 percent. Housing costs were relatively steady, up 3.4 percent on the year in the three months to December from 3.3 percent in the three months to September. This was partly offset by weaker communication prices, down 3.4 percent on the year after a drop of 2.9 percent previously.

Measures of core inflation, which exclude the impact of volatile price changes, were again broadly steady in the three months to December. The trimmed mean CPI inflation measure advanced 0.4 percent on the quarter, as it did in the three months to September, and was unchanged at 1.8 percent on the year. The weighted mean CPI inflation measure rose 0.4 percent on the quarter, up from an increase of 0.3 percent previously, and ticked higher on the year from 1.9 percent to 2.0 percent.

Today's data suggests prices pressures remain subdued for now but are broadly consistent with the RBA's assessment that inflation will likely "pick up gradually as the economy strengthens". Officials' most recent economic outlook, published in November, forecast headline inflation to increase to around 2.25 percent for the year ending in both December 2018 and December 2019. Underlying inflation of forecast to increase to around 1.75 percent for the year ending December 2018 and 2.0 percent for the year ending December 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.)