1. Australia inflation stays restrained, no bar to rate cuts

Australia inflation stays restrained, no bar to rate cuts

Australian consumer prices picked up only modestly last quarter as petrol costs rebounded, while core inflation remained well restrained in an invitation to further cuts in interest rates if needed.

By: | Published: July 22, 2015 8:24 AM

Australian consumer prices picked up only modestly last quarter as petrol costs rebounded, while core inflation remained well restrained in an invitation to further cuts in interest rates if needed.

Wednesday’s data from the Australian Bureau of Statistics showed the consumer price index (CPI) rose 0.7 percent in the second quarter, from the first quarter when it edged up just 0.2 percent. The annual pace of inflation ticked up to 1.5 percent, from 1.3 percent, but came in below expectations.

Key measures of underlying inflation favoured by the Reserve Bank of Australia (RBA) rose around 0.6 percent for the quarter to match market forecasts.

Crucially, the annual pace of core inflation at around 2.3 percent stayed comfortably in the lower half of the RBA’s target band of 2 to 3 percent.

Inflation has now been within the target range for no less than five years – a goldilocks scenario that was low enough to allow interest rates to be slashed but high enough to dodge the dangers of deflation.

“It’s been a very good outcome, because you really don’t want inflation going too low these days,” says David de Garis, a senior economist at National Australia Bank.

“It means the RBA has time to judge the impact of past easing, without having an urgent need to do any more.”

Rates are already at an all-time low of 2.0 percent having been cut twice this year, and the RBA has said that further action is possible given the benign outlook for prices.

Minutes of its July policy meeting released this week showed the Board was confident there was enough spare capacity in the labour market to keep wages, and thus inflation, in check.

Unit labour costs have been little changed for around four years now.

Yet neither has inflation slowed to the lows that so plague policymakers in areas such as the euro zone and Japan.

This is largely due to costs for goods and services that are not open to international competition, known as non-tradables, which make up 60 percent of the CPI basket.

In the year to June non-tradable inflation ran at 2.6 percent, while tradable prices actually fell 0.3 percent.

Much of the rise has been in health, education and products such as tobacco where taxes have been lifted.

Once, stubbornly high non-tradable costs were considered a major drawback, but in a world where deflation is the danger they are proving unexpectedly helpful.

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    Andrew Kirkbride
    Jul 22, 2015 at 9:17 am
    Are they counting product downsizing in these figures ? because I`m seeing inflation everywhere I look ? I don't trust these figures at all ....
    Reply

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