After the good inflation figures for the December quarter, the white collar recessionistas and “rate cut looms” crowd will naturally insist that interest rates have to fall when the Reserve Bank board holds its first meeting on the year on February 7.

Their cries for a rate cut are almost guaranteed by a flat reading on headline inflation for the December quarter, according to the CPI data issued by the Australian Bureau of Statistics this morning.

The CPI rose 3.1% through the year to the December quarter 2011, compared with a rise of 3.5% through the year to the September quarter 2011.

The Reserve Bank’s preferred measures, the Trimmed Mean and Weighted Mean, rose 0.6% and 0.5% respectively in the quarter, up from 0.3% in the September quarter. For 2011, both measures were up 2.6%, (2.6% and 2.3% for the September quarter respectively) which is well inside the RBA’s 2% to 3% inflation target range “over time”.

And they could very well get a rate cut, given there are few, if any inflation pressures evident in the CPI and its various underlying readings for the quarter. As a result the RBA might take notice of the gloom and doom forecasts from the World Bank and IMF in the past week and give us a third precautionary rate cut since last November. But there’s still the chance it won’t, in order to allow itself room to cut if Greece does reach the edge of the cliff and topple over sometime in March-April, which will see it pull out GFC-style big rate cuts.

There are expectations of a fall in headline inflation in the current quarter because of the sharp fall in banana prices (remember Yasi flattened the crop in North Queensland a year ago and sent prices and inflation soaring). Back then, that had the inflationistas and many others worrying about rising interest rates and higher costs, a view that was added to by greedy governments and power and other utility companies that boosted prices for electricity, water and other services.

But all bad things come to an end and the growth of the current banana crop, plus plentiful supplies of fruit and vegetables generally in the second half of the year, have seen inflation pressures ease, helped by the strong downward pressure exerted by the strong Australian dollar (see – there are positives to the strong dollar as well as negatives).

The strong influence of the fall in fruit and vegetable prices is seen from analysis provided by the ABS this morning. It said “the most significant offsetting price falls were for fruit (-13.4%), pharmaceutical products (-5.6%), vegetables (-5.0%), audio, visual and computing equipment (-3.4%), international holiday travel and accommodation (-1.9%) and motor vehicles (-1.2%)”.

They helped offset the impact of significant price rises for domestic holiday travel and accommodation (+7.3%), rents (+1.0), telecommunication equipment and services (+1.1%), beer (+1.2%) and automotive fuel (+0.7%).

The fall in fruit and vegetable prices and a slowing in the price rises for oil and petroleum products this quarter (and the June quarter), compared to a year ago, should help offset the usual yearly movement in power and other utility charges in the next six months.

And bear this in mind: if the current benign price pressures continue, the impact of the carbon tax in the third and fourth quarters of 2012 might not be as noticeable as many fear (and the federal opposition are hoping for).

Peter Fray

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