How government spending is influencing inflation in Australia, in one chart

Quarterly CPI data released this morning showed underlying inflation beat expectations.
There’s a clear divergence in price pressures between the private sector and government-led sections of the economy.

Australia’s quarterly inflation print this morning showed headline inflation just missed estimates.

But despite the headline miss, it was the reading for core — or underlying — inflation that was the main discussion point in markets.

Although inflationary pressures remain relatively weak, underlying CPI rose by 0.52% over the quarter in seasonally adjusted terms, leaving the increase on a year earlier at 1.98%.

The result easily beat expectations of 1.85%, and rounding up the figure would see core inflation growth now at the bottom end of the 2-3% target range set the RBA — which places more weight on underlying CPI for the purposes of setting interest rates.

Fuurther analysis of the result shows when it comes to inflationary forces, a clear divergence has emerged between price pressures in the private sector compared to sectors influenced by government spending.

For evidence, look no further than this chart from AMP chief economist Shane Oliver:

Oliver said that excluding volatile items, inflation in the parts of the economy where the private sector operates is climbing at just 1.1% in annual terms.

“This is in contrast to inflation in the government-influenced parts of the economy, with utilities prices up 9.3% over the year, while health costs are up 4.2%,” Oliver said.

In addition to price pressures, recent data shows government-led sectors are also driving most of the gains in quarterly wage growth.

Quarterly wage growth numbers in February just beat expectations, with the result driven by the public sector while annual wage growth in the private sector remained weak at just 1.9%.

Despite the clear contribution from government-led sectors of the economy, Oliver said the RBA is still likely to keep interest rates on hold for the foreseeable future.

“The inflation data confirms that the bottom in inflation for this cycle has occurred,” Oliver said.

“But, price growth is only running at or just below the bottom end of the RBA’s 2-3% target band and there are no signs of any near-term significant price pressures.”

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