Daily Commentary BY THE CURVE TEAM –

Inflation Misses Again, Positive News on Trade Wars

26th of July, 2018

It was the same old story on inflation in Australia in Q2 with expectations missed yet again and there was little to be encouraged by in the details of the report. Offshore and President Trump’s trip to Europe to discuss trade looks to have yielded some success.

Headline inflation in Australia missed estimates for the seventh consecutive quarter in Q2. The index was saw inflation rise 0.4% against market estimates of a 0.5% rise with the annual rate drifting back to the bottom end of the target band and sitting at 2.1%.

The more important measure, core inflation which is the average of the trimmed mean and weighted median was spot on expectations. Both measures were 0.5% higher with the annual rates falling to 1.9%, below the RBA’s target band.

What was critical in the data was there is continued evidence of inflation in non-discretionary items while price pressures on discretionary items remains absent. This speak volumes to the lack of aggregate demand in the economy driven by households carrying large debt burdens at a time of subdued wage growth.

The data reinforces the ‘gradual’ approach that the RBA continued to point to when it comes to achieving its objectives. It also means there is little to no prospect of a shift in monetary policy by the RBA indefinitely.

Offshore and President Trumps much publicised trip to Europe to discuss trade appears to be a success. In a joint statement this morning by the US and EU the two parties have agreed to work together toward zero tariffs, zero non-tariff barriers and zero subsides on non-auto industrial goods. There was also an agreement for the EU to import more LNG from the US.

The united front put forward by the west and growing prospect of a positive outcome from the drawn out NAFTA negotiations between the US, Canada and Mexico puts the pressure squarely back on the Chinese.

The news of co-operation between the US and Europe has helped lift sentiment and reduced the risk of a full blown global trade war.

David Flanagan

Director - Interest Rate Markets