Daily Commentary BY THE CURVE TEAM –

Inflation Plummets over Q2

30th of July, 2020

As the world imposed lockdown to contain Covid-19 in the second quarter, consumer prices plummeted.

Headline CPI was -1.9% for the quarter, which is only the third negative print since the data began and the largest fall in 72 years. Even the trimmed mean CPI, which excludes the most volatile 30% of price movements still fell 0.1%.

The renowned fall in oil prices at the beginning of the pandemic contributed most to the quarterly declines. Fuel prices fell 19.4%, reducing quarterly CPI by 0.55% percentage points.

Other noteworthy falls were in rent, childcare, travel and education. Rent for the quarter was down 1.33% and childcare was down 95.03% following the government’s policy to provide free child-care. Travel and education prices contributed 0.12 and 0.16 percentage points to the quarterly decline respectively.

The negative read does not bode well for the RBA who aim to have inflation at 2-3% annually. Ongoing factors contributing to the decline will be of most concern.

It would be expected that the inability to travel freely and the expected decline in net migration will continue to put downward pressure on rent, tourism and education prices especially. A boom in domestic demand would be needed to offset declines in these categories.

Beyond July, the influence of government policy to support incomes will also subside. July marks a peak in income support, as people have withdrawn superannuation and continue to receive Jobseeker and Jobkeeper payments. After July and especially after September when the amended Jobseeker and Jobkeeper payments are introduced, incomes are expected to subside. This will put further pressure on prices going forward.

The RBA have been clear that they are willing to do anything necessary to have inflation hit their target band and support employment. If CPI continues to be depressed, it will be interesting to see how long they maintain their current policy.

Today we will hear from the CEO of the Australian Office of Financial Management, who this week issued $15 billion of a 30-year government bonds.

Josh Stewart

Client Relationship Manager