The Australian Bureau of Statistics (ABS) has adjusted both the trimmed mean and weighted median methodology used to measure underlying CPI inflation (the methodology for headline inflation is unchanged). Introduction of the new methodology follows the sixteenth series review of the consumer price index. In December 2010, the ABS completed an extensive review of the Australian Consumer Price Index (CPI) and announced changes to ensure it continued to meet the requirements of the Australian community. The review recommended replacing the 15th series seasonal adjustment methodology used to calculate underlying trend inflation with a methodology using standard ABS practices.
Figure 1 shows our estimate of the difference in underlying CPI as calculated using the previous and new methodology. The most significant change is the decline in the June 2011 quarterly CPI print from 0.9% to 0.6%.
Figure 1: Underlying CPI: previous vs new methodology
For the RBA, we think the revised methodology mean it will likely have to reduce its CPI forecast (other things being equal) for the June-December 2011 period from 3.25% to 3.00% (see Figure 2). This implies the RBA will have more reason to keep monetary policy unchanged for the rest of this year. Assuming international conditions improve, we believe the RBA will continue to tighten monetary policy from Q1 12, given high inflationary pressure arising from labour cost and global inflation.
Figure 2: RBA CPI forecasts: Previous vs new (our estimate)
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ECONOMICS RESEARCH | INSTANT INSIGHTS