Inflation slows but still backs case for rate rises


The annual rate of inflation came in much as expected in the September quarter and while it showed signs of abating the trend might be too gradual for the Reserve Bank of Australia’s (RBA) liking.

The consumer price index rose by 1.0 per cent in the quarter to be up by 1.3 per cent from a year earlier, the Australian Bureau of Statistics said on Wednesday.

Both figures were 0.1 percentage points higher than the median forecast of economists surveyed by AAP last week.

Even so, it was the slowest headline inflation rate for exactly 10 years.

The RBA’s measures of underlying inflation, the trimmed mean and weighted median, both rose by 0.8 per cent after increasing by the same margin in the June quarter.

The weighted median rose 3.8 per cent through the year to September, from 4.2 per cent over the year to June, while the trimmed mean slowed to 3.2 per cent annually from 3.6 per cent.

The average of these annual underlying inflation measures was 3.5 per cent, in line with expectations.

The underlying measures are central to the RBA’s plans for monetary policy and, being uncomfortably above the two to three per cent target band, indicate more interest rate rises are on the way.

In August, the RBA forecast underlying inflation of 2.5 per cent in the year to June 2010.

With one of the four quarters in that year now recorded, the underlying measures would now have to average an unlikely 0.6 per cent per quarter or less to hit that number which now looks like a “best case scenario”.

This supports the RBA’s suggestion, in the minutes of the October 6 board meeting that ended with an interest rate rise, that “the expected trough in inflation was significantly higher than earlier thought.

It also supports the decision to raise the cash rate to 3.25 per cent from 3.0 per cent and expectations that the RBA will continue jacking it up in coming months.

On the other hand, the underlying figures are consistent with a decline, albeit agonisingly gradual, in inflation.

The annualised growth rate of the two series in the most recent half-year was 3.2 per cent, down from 3.8 per cent in the preceding half-year and 4.7 per cent in the half-year before that.

In addition, most other measures of inflation designed to strip out volatile items are on target.

The bureau’s CPI excluding volatile items (fuel and fresh fruit and vegetables) rose by 2.4 per cent over the year, for example.

So, although it cannot be ruled out entirely, it is probably not the time just yet to hit the panic button and start announcing increases of half a percentage point.

The RBA’s board meets on Tuesday next week.


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