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Zero inflation! And interest rates are headed there too

Australia’s core inflation was an annualized 1.4% over the year-ended March 2019, but headline inflation was a disastrous 0% in the March quarter. The result was all the more challenging because several non-discretionary categories saw large increases, while most discretionary items experienced lower prices over the quarter. Regardless, the latest inflation rate news was met by an immediate expectation that in May, Australia’s official interest rate would be reduced to an historic new low.

fig18

To go straight to the dashboard and take a closer look at the data, click here.

As the chart below shows, quarterly inflation of 0.0% in the March quarter or just 0.1% seasonally adjusted and was made up of contributions that ranged as wide as -8.7% for petrol products, to +5.8% for vegetables.

fig19

Although it is not universally the case, the Consumer Price Index (CPI) which measures price inflation as it applies to consumers or households, shows that weak growth in the headline rate has been delivered because of softer prices for items that have a relatively large weight in the ‘basket of goods’ that makes up the CPI. Think of this as the national shopping trolley, where items like electricity, clothing and holidays are a relatively large part of the total trolley.

Factors contributing to the CPI’s flat performance in the March quarter included the drought (higher vegetable prices) and floods (lower expenditure on transport and therefore fuel).

Overall, the contributors to the headline inflation rate’s fall have been larger movements in discretionary items – those that households can avoid. So costs for households are a little cheaper, but if they are struggling, non-discretionary costs (those they cannot avoid) are still showing modest signs of inflation growth.

That aside, at 1.4%, Australia’s inflation rate is now persistently below the Reserve Bank of Australia’s (RBA) target inflation range of 2% to 3% per annum. Indeed, it has been there for around three years, and there is no condition in prospect that will see it rise above that level any time soon.

This is also reinforced when looking below the headline rate at the underlying level of inflation with the trimmed mean and the weighted median all lower during the period.

fig20

To go straight to the dashboard and take a closer look at the data, click here.

For a couple of years now, the orthodox view has been that the next interest rate move would be up. But for all of 2019, that view has been silenced by the realities of a slowing economy, despite the historically low interest rates currently in place.

Typically, lower interest rates free up capital to prime the pump of the economy. New equipment, additional employees, more marketing expenses and so on, should have been the outputs from an interest rate that has been stable at the historic low of 1.5% for almost three years.

At its May meeting, the RBA Board is a better than 50:50 bet to take Australia’s interest rate to 1.25%. The really big question is whether that will prime the pump of a national economy that seems to be wired differently now, and in which lower interest rates make little difference to expenditure. But interest rates lowered just before a Federal Election could make a big difference in other ways.

 

Posted Date: April 29, 2019

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