As expected, inflation eased further in the three months to September, even as the value of the Aussie dollar fell, which in other circumstances would have put inflation under pressure. It’s a result that won’t cause any change in thinking at the Reserve Bank, even if the odd “rate cut looms” enthusiast emerges from the woodwork, as Goldman Sachs did this morning. It’s not the first time that Goldman Sachs has forecast a cut. We are still waiting.

The quarter-on-quarter CPI rate from the Australian Bureau of Statistics was steady at 0.5%, and that caused the annual rate to come back to a headline 2.3% rise, against the 3% rise in the 2013-14 financial year. The most significant price rises over the quarter were for fruit (up 14.7%), new dwelling purchase by owner-occupiers (up 1.1%), property rates and charges (up 6.3%) and other services in respect of motor vehicles (up 5.8%). These rises were partially offset by falls in electricity (down 5.1%, and as forecast by the NAB’s economics team) and automotive fuel (down 2.5% as the fall in oil prices outweighted the drop in the value of the dollar).

The Reserve Bank’s preferred readings, the trimmed mean, rose 0.4% over the September quarter, while the weighted median rose 0.6%. That brought the annual rises in these two measures of core inflation to 2.6% (down from 2.7%) and 2.5% (down from 2.9%) respectively. All well inside the RBA’s 2%-3% inflation target “over time”. The closely watched tradeables group (goods which are subject to international competition) rose 0.3% in the September quarter, down from 0.6% in the three months to June. That caused the annual rate to fall to 2.0% from 2.9%. Non-tradeable inflation (goods that are not subject to competition on world markets, such as utility prices) rose 0.5%, unchanged from the June quarter. That caused the annual rate of inflation in this group to fall to 2.4% from 3.1%.

This isn’t deflation, unlike the eurozone and some of its major economies, such as Italy or France — merely a mild dose of welcome disinflation.

One of the reasons is that there is surplus capacity in the labour market and that is exerting downward pressure on wages. We’ve seen real wage growth fall in the 2013-14 year, especially the six months to June. That’s set to continue: the Reserve Bank at its board meeting earlier this month expected that weak wages growth will offset the inflationary impact of a falling dollar:

“While forward-looking indicators pointed to modest employment growth in the months ahead, there was a degree of spare capacity in the labour market and it would probably be some time before the unemployment rate declined consistently. Wage growth was expected to remain relatively slow in the near term, which should help to maintain inflation consistent with the target even with lower levels of the exchange rate.”

Indeed so low is this CPI report that workers could finally see real wages growth return. If the June wage growth numbers are maintained (we’ll find out next month), it will mean one or two percentage points of real growth — not much, but better than going backwards.

Some business groups, which continually lament how Australia is a “high-wage, high-cost economy”, want more wage cuts. But further real wage falls will simply lead to the obvious result: people will have less to spend, so — unless they decide to eat into their savings — they will spend less, reducing demand in the economy. In June, we noted that a report for the Australian Food and Grocery Council had simultaneously complained about high wages in the agri-food industry and weak consumption growth caused by falling wages. At an economic conference this week, falling real wages were blamed for a lack of consumer and business confidence and identified as a threat to the budget. If the Right and some business groups got their way, Australian workers would be going backwards at a rate of knots — and then there’d be a real problem with demand and confidence. Just what business says it doesn’t want.

Peter Fray

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