Inflation below target for 5 quarters

04_Inflation below target for 5 quarters

Garry Shilson-Josling, AAP Economist

(Australian Associated Press)

The Australian dollar jumped on the latest inflation figures, but that knee-jerk reaction doesn’t tell the real story.

Inflation was weak before the data, and it still is.

The consumer price index rose 0.4 per cent in the December quarter, rather than the 0.3 per cent that formed the mid-point of economists’ forecasts.

The annual inflation rate came in at 1.7 per cent, above the expected 1.6 per cent.

The Australian dollar jumped from just under 70 US cents to just over 70.4, before it began to retreat again.

That move most likely owed more to the unwinding of positions held by traders betting on a weaker number than to anything else.

Inflation is still below the Reserve Bank of Australia’s two to three per cent on-average-over-a-run-of-years target range, and still up only a smidgin from 1.5 per cent at the previous reading.

Inflation has now been below the target band for five quarters in a row.

Despite the latest result being marginally above forecast, there’s no sign of a pickup.

The two measures of underlying inflation favoured by the RBA – they look beyond short-term fluctuations – averaged exactly two per cent. One was a point above the bottom of the range, one a point below.

More importantly, they slowed over the second half of 2015, coming in at an annualised rate of 1.7 per cent over the second half, versus 2.4 per cent over the first half.

The seasonally adjusted version of the CPI told the same story.

The CPI usually grows a little faster in the second half.

Allowing for that, the seasonally adjusted CPI slowed to a 1.1 per cent annualised rate over the second half, from 2.3 per cent over the first half.

The split between the tradeable and non-tradeable components of the CPI, widely watched by economists, shows no signs of inflationary pressures either, from within or from without.

The price of tradeables – those goods and services facing international price competition even if they are produced locally – rose only 0.8 per cent over the past year, despite the lower exchange rate that ought to be boosting import prices.

Non-tradeables, more the focus of the RBA’s attention because they respond to the domestic price pressures the RBA is most able to influence, posted their second consecutive quarterly rise of just 0.4 per cent.

That made it the lowest half-year for non-tradeables inflation since the global financial crisis of 2008/09, with an annual rate as slow as it’s been since 1999.

That means the outlook for interest rates has not changed a jot.

The RBA can cut if it wants to, although it is likely to see little reason to do that right now, nor any real benefit.

And it means there is no reason to contemplate a rate rise at least until later this year, and then only if the economy develops and sustains a bit more momentum than it has at the moment.


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