Daily Commentary BY THE CURVE TEAM –

CPI Bounce

29th of October, 2020

CPI bounced in the third quarter following a sharp fall in the second quarter.

Q3 CPI was up 1.6%. On the surface, this is a large spike. In context though, annual inflation remains subdued at 0.7%, with the Q2 fall of 1.9% dragging the annual figure down.

Underlying inflation likewise remains low, rising 0.4% for the quarter and 1.2% since last year. As per usual with the CPI data, there were a few items that had an outsized effect on the numbers.

The ending of free childcare subsidies during the height of the pandemic saw childcare prices rise 1382%, which contributed over 12% to the overall increase in inflation for the quarter. Petrol prices were also up 9.4% after plummeting in Q2. Furnishings, household equipment and services were also up 12% for the quarter, which is likely in response to a surge in demand as consumers have switched their consumption from services to this category since the early lockdowns.

Interestingly as well, rents fell for a second consecutive quarter, following the first recorded fall in rents in Q2. This likely reflects the lack of population growth as borders have closed, which you would expect will wane on CPI not just in rents but in other categories for some time.

Overseas, anticipated lockdown measures in Europe have come to fruition overnight. France has imposed a national lockdown and Germany has closed leisure businesses, bars and restaurants.

The news caused equity markets to fall and volatility to jump 20% as measured by the VIX index. These updates echo RBA Governor Lowe’s depiction of a ‘bumpy and uneven’ recovery.

Josh Stewart

Associate- Money Markets