If the Reserve Bank of Australia is still worried about the Australian dollar, and wants to cut interest rates, but is also concerned about debt levels and a booming property market, the latest inflation report makes for good reading.
It still gives the RBA an excuse to cut the official cash rate to a fresh record low of 1.25 per cent as soon as next week if it really wants to.
Now, it might be unlikely the bank will make that historic move, but with underlying inflation at a record low, they do have a good case following the release of the September quarter consumer price index.
Despite the rise in the headline number, up 0.7 per cent, the more subdued result in core inflation, up 0.3 per cent – which is what the bank really concentrates on – means anything is still possible when it meets next week on Melbourne Cup Day.
Forget the headline rate, the annual rate of underlying inflation came in at 1.5 per cent when it was meant to be 1.6 per cent.
For sure there was also some revisions from the June quarter that meant underlying inflation was revised up but the lower-than-expected core inflation definitely gives the RBA something to talk about.
If it falls below that 1.5 per cent level it would be very worrying.
Fruit effect
A major reason why the headline number was so high was a chunky 20 per cent spike in fruit prices, courtesy of the floods in South Australia that meant there was a decent fall in supply.
But that won't last.
Ironically enough investors only had to look at the latest sales growth from Coles, also released on Wednesday, to see there is still fierce and ongoing competition in the $90 billion groceries space.
It is going to hold down food prices for some time yet.
Indeed, same-store sales growth for Coles has slowed to the lowest level for seven years as competition intensifies in the grocery market.
It means Coles will be under pressure to get more involved in aggressive promotional price reductions to combat the behaviour of competitors such as Woolworths, Aldi and other independent retailers.
And when lined up with the June quarter CPI report, there were more sectors overall that showed prices are still falling.
Low inflation to linger
With the $A hovering around US76.88¢ and no prospect of anyone getting a decent pay rise anytime soon it seems that underlying inflation is going to stay low for quite some time.
For example, non-tradeables – or goods and services that have to be consumed where they are bought, such as rent, utilities, insurance and education – were slightly higher, but still remain close to their weakest level in 17 years.
It's clear that domestic price pressures remain subdued.
The bank won't like that, or the spike in the $A to US77.10¢ minutes after the release of the inflation report when the FX crowd got blindsided by the headline number.
That sort of price action shows the bank what can happen to the currency if the easing bias goes away.
When the RBA cut the official cash rate to 1.5 per cent in August the $A was US76.10¢ and that's important.
Combined with low interest rates the bank looks at a low dollar as a vital part of the plan to get the economy growing faster.
Offshore eyes return
But with so many central banks using QE, a rebound in commodity prices and the Federal Reserve slow to hike rates it means offshore investors are looking at our dollar again.
If the bank had not cut rates in August it would probably be closer to US80¢ by now.
That's going backwards.
Because of the high exchange rate, and a low inflation report, the bank ended up cutting the official cash rate.
It's a major reason why a rate cut can't be ruled out again.
