How low is it really?

You'll have likely seen the news that overall inflation has come out lower than the Reserve Bank's target, and lower than forecasters had expected: 0.4% in the year to June, made up of tradables prices down 1.5% and non-tradables up 1.8%. Full details from Stats here.

With the overall CPI at the mercy of exchange rates and international commodity, things that the Reserve Bank has little or no control over, I like to look at one of the sub-components that gives us a better idea of how domestic inflation is going - non-tradables inflation (i.e. generated domestically), but excluding housing and the housing utilities group, which as we all know is running hot. And yes, the housing inflation is a real phenomenon in its own right, but for present purposes I'd like to see how everything from the school fees to the vet's bill are going. Here it is. I've included a mechanical "but for the GST rate increase in 2010" adjustment.

If you're the Reserve Bank, this is (at best) slightly encouraging. Domestic inflation has stabilised, and it's a bit higher (0.9%) than the headline 0.4%. But it too is just below the bottom of the 1% to 3% target band, and well adrift of the 2% mid-band point the Bank is aiming for.

Thursday's economic update from the Reserve Bank is going to be interesting...