Inflation moderated in the June quarter, according to this morning’s Consumer Price Index release from the ABS, dramatically reducing the chances of a hike in the RBA cash rate when the RBA Board meets next week.

The headline rate was 0.6%, down from 0.9% in the March quarter, meaning an annual rate of 3.1%, well below market forecasts. The underlying rate was also 0.6%. Using the RBA consumer price measures, the annual rate was 2.7%.

The rise, significantly lower than expectations, which ranged as high as 1%, will be welcome news to Labor, which had been dreading receiving the same mid-election rate rise that wounded the Howard Government in 2007. The case for the RBA to raise rates, particularly given continuing global economic uncertainty, is now considerably weaker.

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Instead, inflation appears to be unexpectedly moderating after a lower-than-expected Producer Price Index result on Monday. The biggest increase was government-driven, with excise increases driving tobacco prices up 15%. Fruit and veg prices actually fell significantly (4.8% and 3% respectively), and overall food prices fell slightly.

The number will enable Labor to ramp up its claims to being a superior economic manager, pointing to strong economic growth, a rapid return to surplus, falling unemployment and low inflation as vindication of its economic strategy.

This morning the Coalition also announced a significant back flip on tax policy, with the corporate tax rate to be lowered to 28.5% from 2013 by a Coalition Government. The rate is 0.5% lower than that proposed by Labor, but the overall tax rate will still be higher on large and medium companies due to the paid parental leave levy of 1.7%. The move is clearly in response to the success the Government has been having in linking the PPL levy to increases in grocery prices, at the centre of “cost of living issues” on which both sides have relentlessly harped.

Shadow Treasurer Joe Hockey also signalled a back flip on the levy itself, saying the Coalition would “have more to say” on the issue when it was formally launched later in the campaign. This is likely to be an abandonment of the levy, in an effort to concentrate Coalition fire entirely on the Government’s MRRT. Whether the political pain associated with such a dramatic back flip will be worth it remains to be seen, but at this stage there is no RBA rate rise coming to the Opposition’s rescue on economic credibility.

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Peter Fray
Peter Fray
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