As expected, consumer price inflation fell to an 11-year low in the December quarter to produce a noticeable easing in price pressures in the economy, especially for petrol, but not for food, which jumped in the closing months of last year. The data increases pressure on the Reserve Bank to again cut interest rates when it meets next Tuesday.

Figures released today by the ABS revealed a fall of 0.3% in the CPI for the December quarter, making the 2008 year rate 3.7%. That compares with a sharp 1.2% jump in the September quarter and an annual rate of 5.0%.

The figures were the weakest since the September quarter of 1997.

The Reserve Bank’s version also eased from an average annual rise in the September quarter of 4.7% for the trimmed mean while the weighted median (the RBA’s two measures) fell to 4.35% in the December quarter. Not as dramatic as the headline rate, but still a softening.

The headline rate was a touch under the market forecast for a fall of 0.4% and an annual rate of 3.6%.

The ABS said that excluding “housing, financial and insurance services’ the fall in the quarter was a larger 0.7% and the rise over the year was a much smaller 2.4%.”

In the September quarter, the ABS said the rise without finance, housing and insurance was 0.7% and the annual rate was 3.8%, so the impact of price cuts other than interest rates is obvious.

The big influence was a 6.9% drop in the cost of transportation in the quarter and a fall of 1.2% over the year. In the September quarter, there was a 1% rise and the annual rate was 8.7%, so the extent of the impact of the sharp fall in oil prices can be seen.

The ABS said the most significant price falls this quarter were for automotive fuel (-18.2%), motor vehicles (-2.4%), deposit and loan facilities (-1.9%) and pharmaceuticals (-4.7%), while the most significant offsetting price increases were for rents (+1.8%), fruit (+8.0%), tobacco (+1.7%) and take away and fast foods (+1.5%).

There had been thoughts that there might be a small rise in the CPI after the slumping Australian dollar pushed import prices and producer prices up by more than expected in the quarter. An end to falling fruit and vegetable prices was also reflected in the producer price index and was thought of as a possible cause of a sharper than expected figure.

But that wasn’t to be, even though Woolworths reported slowing interim and second-quarter sales figures, even as food price inflation jumped to an annual 4.8% in the three months to December from 3.2% in the September quarter as “deflation in produce ceased”.

But other figures released from the Department of Education, Employment and Workplace Relations (DEEWR), reveal the sharp fall in demand for skilled labour over the past year, a pointer to rising levels of joblessness in the months ahead.

The figures showed a 7.7% fall in skilled job vacancies in January, with the department’s skilled vacancies index hitting 56.1 points this month, 43.4% lower than in January 2008.

Vacancies fell in all three occupational groups monitored by the department.

Trade vacancies declined 10%, associate professionals fell 8.8% and professionals dropped 4%. The department said the fall in skilled vacancies was widespread, with decreases evident in 17 of the 18 professions monitored. The only occupation to rise was medical and science technical officers, increasing by 2.9%.

All states and territories experienced decreases in skilled vacancies in January, the largest drop being 10.4% in NSW; while all states and territories reported falls in the year to January, with NSW again leading the way with a plunge of 57.3%.

And the Westpac/Melbourne Institute leading index dropped in November, a pointer to the economy moving into recession this year.

The index is a way of looking at future economic growth and it fell 1% to 253.5 points from October. Westpac said the index shrank at an annualised 2.2%, the first negative reading since May 2001.

According to Westpac economics chief Bill Evans, the fall in “the leading index coupled with the further deterioration in the global environment intensifies the risk that the Australian economy will contract through 2009.”

“There seems little doubt that the central bank will decide to further reduce the overnight cash rate,” he added.

Today’s inflation figures will allow a rate cut of up to 1%, perhaps 1.25% to happen next Tuesday, or over February and March to get the rate down to 3% as quickly as possible.

The cash rate is now well above the annual inflation rate of 3.7% and the RBA board said in December in cutting rates by 1% that it had “judged that a further significant reduction in the cash rate was warranted now, to take monetary policy to an expansionary setting. As a result of today’s decision, the cash rate will be at its previous cyclical low point.”

Well, that was when the CPI was 5% and the RBA’s measure was an average 4.7%. The CPI has now fallen well under the cash rate and the RBA’s measure is now within 0.10% of the cash rate, so another big rate cut is needed to make sure the expansionary nature of monetary policy is preserved, especially with the global economy tanking and some early signs of an accelerating slowdown here.

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Peter Fray
Peter Fray
Editor-in-chief of Crikey
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