Inflation: Consumer price rises remain subdued, little pressure to raise interest rates

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Michael Janda | ABC | 25 January 2017

http://www.abc.net.au/news/2017-01-25/inflation-cpi-abs-december-quarter/8211076?section=business

A slightly lower-than-expected inflation figure has given the Reserve Bank scope to keep interest rates lower for longer.

The Bureau of Statistics headline Consumer Price Index (CPI) rose a moderate 0.5 per cent in the December quarter, down from 0.7 per cent in the three months to the end of September.

That puts annual inflation at just 1.5 per cent, well below the Reserve Bank’s targeted 2-3 per cent level.

The bank’s preferred measures of core inflation – which strip out the most volatile price moves – were both at 0.4 per cent for the quarter, and also around 1.5-1.6 per cent for the year.

Tobacco (+7.4 per cent), fuel (+6.7 per cent) and restaurant meals (+1.1 per cent) were the most significant price rises in the quarter.

Vegetables also posted a 2.5 per cent rise last quarter due to adverse weather in major growing areas, with potatoes, capsicums, broccoli and cauliflowers most affected.

Offsetting those increases in the quarter were price falls for salad vegetables and celery.

Nonetheless, vegetable prices were up 12.5 per cent over 2016.

Price falls for furniture (-1.5 per cent), telecommunications equipment and services (-0.8 per cent) and personal accessories (-5.1 per cent) were some of the major offsetting price falls during the December quarter.

The Australian dollar fell a little on the data as it makes a rate rise from the Reserve Bank less likely in the near term, and keeps open the possibility of further rate cuts.

One Australian dollar was worth 75.33 US cents at 12:20pm (AEDT).

However, Commonwealth Bank economist Gareth Aird said the most likely scenario for interest rates is for them to remain on hold for many more months.

“The annual rate of underlying inflation is right in line with RBA forecasts which, in our view, keeps a rate cut off the table next week,” he wrote in a note on the data.

“It does, however, look like the slowdown in inflation has come to an end which supports market pricing that 1.5 per cent is the low point for the cash rate.

“The risk, however, sits with easing over the next six months and, in our view, talk of a rate rise is premature.”

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