New inflation figures were released at 11.30am, and show that headline inflation was negative 0.1 per cent for the Quarter, or 3.3 per cent for the year to December. This is unambiguous good news, and is below the average economist’s guess of plus 0.2 per cent.

This wonderful result is mainly due to big falls in the price of petrol, other fuels and fruit – the decrease in automotive fuel contributed -0.86 index points to the December quarter CPI movement, but there is also a banana-led recovery, and also the impact of new work practices.

So called “underlying” inflation is a measure the RBA takes far more notice of. This was 0.5 per cent for the quarter and 3.0 per cent for the year to December. These numbers too are down from the September quarter and also below the average economist’s prediction.

Central banking aficionados will know that the Consumer Price Index – actual or underlying – is but one (two?), albeit the most important, figure(s) the Reserve Bank looks at when making decisions on interest rates. Other economic indicators – eg the rate of unemployment – suggest the direction inflation will take in the near future.

As we all know the “official” unemployment rate currently sits at a 30-year low of 4.6 per cent. However, the RBA knows as well as anyone that this is an artificially low figure. Other measures of unemployment, such as the Roy Morgan Unemployment Estimate places unemployment closer to 7 per cent – a much more believable result.

The Productivity Commission has focused on labour market participation in seeking to understand various mysteries in the Australian economy, including the apparently alarming drop in labour productivity so far this century. There has undoubtedly been a big gain in employment in recent years, but participation by males has fallen, while female participation has continued to rise. This is one important piece of evidence that there is room for increased participation to ease labour market pressures yet.

Henry notes that the lack of any substantial wage-push inflation – which would be boosting underlying inflation if the real rate of unemployment were as low as 4.6 per cent – further supports the idea that the labour force is not as tight as the official figures suggest.

All this gives Messrs Howard and Costello a huge free kick. The Reserve Bank will not feel compelled to hike interest rates, at least for the time being. Coming on top of the new war cabinet this relatively benign inflation result keeps them well in the game.

Read more at Henry Thornton.

Peter Fray

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