Weak Australian inflation points to rate cut

The falling prices of vegetables and technology goods have helped to keep Australian inflation subdued, triggering a fresh round of interest rate speculation.

The consumer price index, a measure of prices paid by consumers for commonly bought items, rose only 0.2 per cent in the December quarter, below expectations, with the inflation rate lifting to 2.2 per cent for the year, according to the Australian Bureau of Statistics.

Underlying inflation was 0.6 per cent for the quarter, the data showed.

Economists had expected the CPI to show an average rise of 0.4 per cent in prices for the quarter, with an annual inflation rate of 2.4 per cent, in the middle of the Reserve Bank of Australia's target range of 2 to 3 per cent.

Domestic holiday travel and accommodation led the most significant price rises, lifting by 6.2 per cent, the Bureau of Statistics data showed. Car fuel rose by 2.6 per cent and rents by 0.8 per cent.

At the same time, the price of vegetables dropped by 5.7 per cent. Prices for audio, visual and computing equipment also sank 4.3 per cent, while prices for pharmaceutical products slid 3.5 per cent.


"These numbers are coming a bit below the RBA's own forecasts, so inflation is possibly surprising them slightly to the downside," said Su-Lin Ong from RBC Capital Markets.

"It increases the risk of a rate cut, because inflation is coming in lower than what the RBA had forecast and because it is in the bottom half of the target range and very well-behaved ... But this will increase speculation of a move from them sooner rather than later, given what's been fairly disappointing activity data domestically."

The figures were expected to show a slow down in prices for the last quarter of 2012, but were not expected to be sufficiently low to increase pressure on the RBA to cut interest rates again at its next meeting on February 5.

But today's result came in at the low end of forecasts, which could affect the RBA's deliberations at its upcoming meeting. Some analysts said that a less than 0.5 per cent rise in inflation for the December quarter could trigger a 25 basis point cut in February.

The Australian dollar dipped following the inflation result as investors bet the result had increased the likelihood of a rate cut next month. The Aussie fell to a session low of US$1.0541, from US$1.0558 to fetch US$1.0548, showing a 0.2 per cent drop on the day.

Holding pattern

But ANZ senior economist Riki Polygenis said while headline and underlying inflation had come in a little weaker than expected, even when it included the second-round effect of the carbon tax, she did not expect the Reserve Bank to act next month.

"We still think that it's unlikely that the RBA will move in February, but it doesn't rule out rate cuts later in the year if the non-mining economy remains slow," Ms Polygenis said.

"We think the more critical releases for the RBA will be the capex (capital expenditure) expectations for 2013/14 and the next labour force report, both due after the RBA meeting in February.

"Inflation has taken somewhat of a back seat to other concerns about economic activity at the moment."

The Westpac-Melbourne Institute index of consumer sentiment for January rose by just 0.6 per cent in January from the month before, data released last week showed, disappointing analysts who had hoped that the Reserve Bank's easing cycle would boost confidence.

Last week, the Bureau of Statistics reported that the unemployment rate rose to 5.4 per cent in December from an upwardly revised 5.3 per cent in November, as the number of employed people fell by 5500.

- With Reuters

Sydney Morning Herald