The ABS has just announced the release of a new seasonal-adjustment methodology to its measures of inflation. I have not examined this in great detail, but the short-strokes summary seems to be an upward revision to core inflation in Q4 last year (from 0.4 to 0.55 per cent), the same core inflation estimate in Q1 this year (that is, 0.85 per cent) and a substantial downward revision to core inflation in Q2 this year to 0.6 per cent (from 0.9 per cent) with the RBA's preferred benchmark, the trimmed mean, falling from 0.9 per cent to 0.7 per cent. The year-on-year numbers for core inflation are similar: the new estimate is +2.55 per cent versus the old of +2.7 per cent. The average core inflation in the first half of 2011 is 2.9 per cent per annum, which, while uncomfortably high for the RBA, is quite a bit lower than the previous estimate of 3.4 per cent per annum. Interestingly, overall core inflation since 2002 looks to have been a little higher, especially during the pre-GFC period.
Assuming all of this is correct, we can infer two things: the worrying trend of extremely strong core inflation originally reported by the ABS appears not to be as disturbing as first reported; and, if this is the case (and the RBA concurs, which is no given since the RBA and ABS do not always see eye-to-eye on this stuff), there is less of a need to rush off rate hikes, subject, of course, to the Q3 inflation results, which we will get shortly. Put another way, if the ABS reported 0.6 per cent core inflation prior to the August Board Meeting, every economist in Australia would have been calling a no-move. And these adjustments by the ABS further remove the barrier to rate cuts in the event that we need them.
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