How the June Quarter CPI number affects financial markets?
The Australian Bureau of Statistics (ABS) released the consumer price index (CPI) for the June quarter 2019. The data released by the ABS showed a CPI movement of 0.6 per cent in June quarter 2019 relative to the March quarter 2019. This is an increase from the previous December 2018 to March 2019 quarter that showed a CPI movement of 0.0 per cent. The June quarter 2019 increase of 0.6 per cent is slightly higher than the market’s consensus forecast of 0.5 per cent.
The June quarter 2018 to June quarter 2019 showed an annualised CPI movement of 1.6 per cent, while the March quarter 2018 to March quarter 2019 showed an annual CPI movement of 1.3 per cent. This upward movement is expected because the March quarter result was so low.
One of the goals of the Reserve Bank of Australia (RBA) is to maintain the inflation rate between 2 – 3 per cent range. The RBA tries to achieve this goal through the use of the monetary policy. If inflation is below this target, the RBA could use an expansionary monetary policy to increase the general price level. In contrast, if inflation is above the target, the RBA could use contractionary monetary policy, to reduce the general price level.
With the annual inflation rate of 1.6 per cent being below the RBA inflation target of 2 – 3 per cent, investors expect the RBA to further reduce the cash rate over the next six months or so. Today’s CPI number does not change this expectation. The cash rate is currently at 1.00 per cent, following the last two 25 basis point reductions in the cash rate over the last two meetings of the RBA Board.
Finally, the equity market’s initial reaction to the release of the June quarter CPI number is broadly neutral as the June quarter CPI number is only slightly above market expectations.
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