The CPI came out higher than most forecasts at 1.9 percent for the year. This was around 20 to 30 percentage points higher than expected and has resulted in many predicting the RB’s easing of monetary conditions is over and tightening could be sooner than expected. But let’s get a grip and consider why the prices were higher than expected rather than jumping on the inflation bandwagon.

The CPI was up 0.6 percent in the June Quarter, following an increase of 0.3 percent and a decline of 0.5 percent in the previous two quarters. The culprit on the annual change was the 1.5 percent increase in September quarter 08. This will fall out of the annual number next quarter, so a similar increase in the next quarter of 0.6 percent would result in an annual increase of 0.9 percent. This is actually below the target band of 1 to 3 percent.

And what actually drove the increase of 0.6 percent this quarter? Food prices were up 0.9 percent, a result of cold weather affecting the supply of vegetables. The transport group was up 0.6 percent, a result of a 3.2 percent increase in petrol. While food prices are up 7.5 percent on the year, transport prices are down by 6.6 percent. Petrol has since come down again and we are likely to see a further drop in the next quarter as oil prices have fallen again recently.

Finally, the 1.9 percent increase on the year is the smallest annual increase in almost two years. And well down from the 3.0 percent annual increase in the previous quarter and the 4.0 percent in June 2008. The figure below shows the annual change in the CPI, which doesn't appear to be easing or turning.

Therefore, to suggest that inflationary pressures are likely to return soon based on this quarter’s annual result is a kneejerk reaction from commentators who were wrong in their predictions. 

Further easing in monetary policy, which may well be required in the future if the recession continues, should not be discounted due to a unfounded fear of a rampant return of inflation!

I must admit that in our latest June 2009 Forecast, BERL did forecast the June 09 CPI to fall to 1.9 percent.  We expect it to drop further to 1.1 percent in the September 09 quarter before returning to the 2 percent range from December 2009.