Economists unconvinced record-low inflation spells further rate cuts

Economists have played down the prospect of a further interest rate cut, despite new data showing that inflation has slipped to its lowest point since 1999.


The data shows both headline and underlying inflation have continued to moderate throughout the year, to be at their lowest level in 13 years.


The Consumer Price Index rose 0.5% in the June quarter, up from 0.1% in the March quarter.


Headline inflation was 1.2% through the year to June, down from 1.6% through the year to March. Headline inflation over the year is now at its lowest level since June 1999.


Underlying inflation was 0.6% in the June quarter, up from 0.4% in the March quarter.


Underlying inflation was 2% through the year to June, down from 2.2% through the year to March, also reaching its lowest level since June 1999.


But while the moderation in headline and underlying inflation is welcome, many households continue to face cost-of-living pressures, according to the data.


While fruit and vegetable prices are still below their levels prior to last year’s natural disasters, they rose 4.6% in the June quarter, contributing 0.1% to headline CPI growth.


There were also price rises in areas like health, furniture and transport, although this was partly offset by a 1.3% fall in recreation and culture prices, which detracted 0.2% from quarterly CPI growth.


According to Federal Treasurer Wayne Swan, the figures should serve as a reminder that the fundamentals of the Australian economy “are in very good shape indeed”.


Swan also downplayed the price rises, insisting most of the rises this quarter were “contained across the board”.


“These figures… give Australians reason to be optimistic and Australians reason to reject the doomsayers who constantly talk our economy down,” Swan said at a press conference.


HSBC chief economist Paul Bloxham says low inflation leaves the door open for the Reserve Bank to cut interest rates further, but that doesn’t mean it will happen.


“It has already cut rates [by] 0.75 points in the past three months. On local conditions alone, it is unlikely to go further,” Bloxham says.


Similarly, Westpac chief economist Bill Evans says the inflation data will give the RBA “some comfort” from a medium-term perspective.


“The [RBA] governor has often expressed some concerns with the ‘stickiness’ of non-tradable inflation which, until recently, was running at close to a 4% yearly pace,” Evans says.


“This moderation in non-tradable inflation will serve to allay those medium-term concerns. This print, which is in line with our forecast, does not change our outlook for monetary policy.”


“We expect the next rate cut in the December quarter, with a total of 75 basis points of cuts by early next year.”


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