Australia’s Consumer Price Index (CPI) was unchanged at 2.4% YoY for April. This figure equaled last month’s increase and beat out market expectations of a 2.3% increase. This is a remarkable steady rate. It goes beyond their specific issue to represent a much larger economic environment in which core inflation measures are driving central banks around the world to monetary policy actions.
Core inflation, which excludes the more volatile food and energy prices, is something that central banks in the U.S. Perhaps no one recognizes just how important this figure is to our economic stability. As such, the Reserve Bank of Australia (RBA) has a mandate to focus on this core inflation and maintain it around their target rate of 2%. Usually when core inflation crosses this line in the sand, central banks react. So they often think about raising the interest to penalize economic activity. Alternatively, in the case of an underperformance of core inflation below the target, there could be a decision to lower interest rates to boost economic activity.
The Role of Core Inflation in Economic Policy
Core inflation remains a key barometer. The Fed closely watches core inflation, as a valuable indicator to economic policymakers of the underlying price trends. Central banks, including the RBA, use this measure to determine the presence of inflationary pressures. Then they use this information to feed smart fact-based decision-making about monetary policy. The first of these five goals dovetails significantly with the RBA’s existing mandate to maintain price stability while fostering economic growth and employment.
The current core CPI figure takes on critical importance. At an unremarkable 2.4%, that would be a timely reminder that inflation is still well below any catastrophic or crash levels. This is a very positive move, and one that economists will be watching closely over the next few months. If it moves too far above or below that 2% goal, we could expect to see changes in interest rates.
In the past, anytime core CPI has breached that 2% target, central banks have usually reacted by raising interest rates. This move is meant to reduce consumer spending and business investment, so it contributes to bringing down inflation. A big decline in core CPI will justify and make possible the next round of rate cuts. These cuts promote consumer spending and investment, which in turn fuels positive economic growth.
Current Headline Inflation Trends
Australia’s headline inflation rate did not change in April, remaining at 2.4% year-over-year. This rate is the average for all items in the CPI basket. This figure doubles down on the robust growth seen in March and is right in line with the market prediction. This monthly stability in headline inflation reflects that overall price pressures in the economy are still quite modest.
Headline inflation is usually reported as the percent change from one month to the next and from one year to the next. More importantly, the relatively stable 2.4% rate at least assures that consumers have not felt these rapid price increases along this line in the last few years. It is important that this much-needed inflation is maintained to protect the purchasing power of Australian households.
The RBA will be watching these trends closely as it determines the appropriate stance of monetary policy. Inflation is stabilized in the short term. This means lower near-term risk for the central bank to need to raise or lower interest rates, helping to produce a calmer overall economic picture.
Implications for Future Economic Outlook
This recent stability in both core and headline inflation is a double-edged sword for economic stakeholders. Although consistent inflation is a sign of confidence in economic behavior, it raises careful consideration of your ability and growth in the future. Economists across the political spectrum will tell you that keeping inflation steady, near the target level, is key to a long-term sustainable fiscal future.
If inflation picks up much higher than 2%, the RBA will need to strike a serious note. This is an important step for stopping the economy from overheating. Perhaps most importantly, this would require further monetary policy tightening via interest rate increases that would curtail consumer expenditures and business investments.
A core CPI downward trend will reflect weakening demand and thus deflationary pressure. For instance, the RBA could cut interest rates to take a more accommodative policy tilt. This would further reduce interest rates, aiming to re-stimulate economic activity, and help increase demand for loans, thus increasing borrowing and consumer and business spending.