Inflation in the December quarter showed a marked slowing, but it's unlikely to lead to an interest rate cut, Glenn Dyer and Bernard Keane write.
Cheaper petrol and a flat economy have pulled Australia's inflation rate down to its lowest level for two years, with CPI for the December quarter just 0.2%, and 1.7% for the 2014 calendar year, according to the Australian Bureau of Statistics
. Underlying cost pressures (which the Reserve Bank looks at) also remain well inside its 2-3% target range.
Price rises were caused by increases in the cost of domestic travel and accommodation (usual at the end of the year as the long summer holiday break approaches), while tobacco cost more (rises in excise) and the housing boom pushed housing costs higher as well. But offsetting that, in part, was a sharp fall in the cost of petrol, to five-year lows. Adelaide had a slightly higher rise, at 0.3%, while Perth, Hobart and Canberra were all 0.1%.
But don’t start looking for a rate cut from the Reserve Bank -- in fact, the dollar rose more than half a cent to just under US80 cents just before midday. There’s nothing dramatically new in the figures. Australian inflation has fallen, but has been lower in a quarter on several occasions in the past five years (in 2010-11, for example) and lower on an annual rate as well. Inflation is not dramatically lower as it has become in the US and most parts of Europe and the UK since the fall in oil prices accelerated in November.
The Reserve Bank’s preferred measures -- the trimmed mean and weighted median -- both rose 0.7% in the quarter, slightly faster than the rises of 0.4% and 0.6% in the September quarter, indicating underlying inflation pressures flowing from the fall in the value of the dollar. But over the year to September, the trimmed mean rose 2.2%, down from 2.5% in the previous quarter, while the weighted median rose 2.3%, slowing from a 2.6% annual rate in the September quarter. So down slightly, but not dramatically so. This will make the Reserve Bank cautious about a rate cut, as demanded by the likes of Westpac and others, and tipped by more restrained analysts at the NAB, and the AMP’s chief economist Dr Shane Oliver.
If you want a real guide to the RBA's thinking about where rates will go in the coming months, re-read what RBA Governor Glenn Stevens said in his post-meeting statement early last month
and wait until next Tuesday afternoon, when an update will be issued. Watch what he says about inflation, the fall in the value of the dollar and then the final paragraph of his statement which will set the broad parameters of RBA policy for much of 2015. In his December statement, Stevens said this about inflation:
"Inflation is running between 2 and 3 per cent, as expected, with recent data confirming subdued rises in labour costs. Although some forward indicators of employment have been firming this year, the unemployment rate has edged higher. The labour market has a degree of spare capacity and it will probably be some time yet before unemployment declines consistently. Hence, growth in wages is expected to remain relatively modest over the period ahead, which should keep inflation consistent with the target even with lower levels of the exchange rate.”
So, for the central bank:
"Looking ahead, continued accommodative monetary policy should provide support to demand and help growth to strengthen over time. Inflation is expected to be consistent with the 2–3 per cent target over the next two years. In the Board's judgement, monetary policy is appropriately configured to foster sustainable growth in demand and inflation outcomes consistent with the target. On present indications, the most prudent course is likely to be a period of stability in interest rates.”
On this morning’s inflation figures, there’s no real reason for much change in those comments, except to update them for what has happened in the last two months.