Last year, inflation surged in the September quarter thanks to the initial impact of the carbon tax and higher prices for fruit and vegetables. But data out today shows that spike collapsed in the December quarter.

In fact, inflationary pressures eased noticeably in the three months to December, taking pressure off consumers and opening the way for the Reserve Bank to cut rates again if it feels the domestic economy — and especially housing — needs another jolt from a cut in interest rates. But that rate cut won’t happen just yet as the RBA will wait to see how 2013 unfolds.

The Australian Bureau of Statistics data reveals the headline rate of inflation rose by just 0.2% in the quarter, sharply down from the 1.4% rise in the three months to September, and well under market forecasts for a range of rises of 0.4% (Bloomberg) and around 0.7 (AMP and others). The ABS said the rise was driven by increases in the cost of domestic holiday travel and accommodation (+6.2%), automotive fuel (+2.6%) and rents (up 0.8%).

Offsetting these increases were falls in the prices of vegetables (–5.7%; largely expected by economists following reported falls in the quarter because of greater supplies), a 4.3% fall in the price of audio, visual and computing equipment and a 3.5% fall in the cost of pharmaceutical products (also expected, with the annual price cuts from changes in the Pharmaceutical Benefits Scheme by the federal government).

The CPI rose 2.2% through the year to the December, compared with a rise of 2.0% in the year to September.

The important core readings of the Reserve Bank, the “weighed median” and the “trimmed mean” also saw falls to a quarterly rate of 0.5% and 0.6% respectively. That was down from the quarterly rate in the three months to December of 0.8% and 0.7% respectively. For the year to December, the annual rate of growth in the “weighted median” eased to 2.3% from 2.6% and for the “trimmed mean” the rate of growth eased to 2.3% from 2.4%.

That’s an average annual rate of 2.3% and an average quarterly rise of 0.55%, both of which are comfortably within the RBA’s target range (an annual rate of 2% to 3% over time).

Analysts say the fall suggests business has absorbed more of the carbon tax rise than previously expected. The tax was expected to add around 0.7% to inflation over the 2012-13 financial year. It could be because businesses face pressure from hesitant demand from consumers who prefer to travel, spend money offshore on the internet and buy new cars (it’s significant that the cost of cars rose sharply in the quarter as demand boomed, especially for sports utility-type vehicles).

Peter Fray

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