Australia’s low inflation environment is set to continue. This is great news for consumers, who will have their purchasing power further enhanced with price increases remaining lower than wages growth and pension rises.

It is probably not good for the business sector that generally likes a little bit of inflation to help build margins and profits.

The ongoing low inflation climate is, from a budget framing perspective, dreadful news for the government. Low inflation means slow growth in tax receipts which will make the challenge of getting a budget surplus in 2013-14 all the more difficult. The budget papers, to be released on 14 May, will no doubt have a lot of words written about the ‘nominal’ economy or, in other words, how low inflation as Australia’s terms of trade falls continues to undermine government revenue.

While the official Australian Bureau of Statistics inflation data for the March quarter are not due for release until 24 April, the ever-reliable TD-MI monthly inflation gauge suggests that the rate of price increases in the first three months of 2013 are well contained.

The TD-MI gauge shows that consumer prices rose 0.2 per cent in March following no change in February and a 0.3 per cent rise in January. Applying this run of monthly increases to the methodology the ABS uses to calculate the CPI on a quarterly basis, and it looks like the official inflation rate will come in at around 0.4 per cent for the March quarter. This translates to an annual increase of 2.5 per cent, which is slap, bang in the middle of the RBA target range.

Don’t forget that this 2.5 per cent annual rise in headline inflation includes a contribution of about 0.7 percentage points that resulted from the introduction of the carbon price on 1 July 2012. This is a one-off price shift, like when the goods and services tax was introduced in July 2000, and is not a part of what the RBA often refer as “ongoing inflation”. The RBA has said it will overlook the direct effect of carbon pricing on the inflation rate when considering monetary policy decisions.

The key point is that annual inflation, excluding the carbon price, is under 2 per cent.

In terms of the underlying inflation rate, which the RBA focuses on more when it comes to monetary policy considerations, it appears that the March quarter rise will be around 0.6 per cent for an annual rise of 2.5 per cent. The underlying inflation rate is constructed by the RBA to remove temporary inflation noise as it “trims out” items with big price rises and falls that often show up in food or petrol or even electricity. A price jump in bananas due to a cyclone in Queensland is not relevant to medium term inflation pressures because the price rise reverses when crops return.

In terms of the underlying inflation rate that will be published when the March quarter CPI is released, there will be some carbon price impact which is likely to be around 0.25 percentage points. In other words, the true underlying inflation rate is around 2.25 per cent.

All of which shows that inflation remains in check. The high Australian dollar, moderate wages growth and a recent softening in labour market conditions are capping price gains and are set to be in place a while longer. The absence of global inflation pressures feed further into this view.

There are signs that parts of the domestic economy are picking up, most notably house prices, consumer sentiment, retail sales, stock prices and job advertisements. The business investment outlook remains buoyant.

In normal times, this would suggest the need for monetary policy to return to neutral, which means increases in official rates from the current 3.0 per cent level. The low inflation climate, however, appears to be sufficiently entrenched to make sure the RBA keeps interest rates will be on hold for many months to come.



Read more: http://www.businessspectator.com.au/article/2013/4/1/interest-rates/australia%E2...

Andrei.Hicks wrote on Apr 1^st, 2013 at 12:46pm:



If a conservative returned the same outcome you would be extatic.

MOTR wrote on Apr 1^st, 2013 at 1:30pm:


Whatever you say, Comical Ali...

Shagging the economy.  Such a good tactic to keep inflation low. 

MOTR wrote on Apr 1^st, 2013 at 2:20pm:


Yes so why retard it with taxes?

MOTR wrote on Apr 1^st, 2013 at 2:27pm:


Yes, and why...greater company profits greater company tax revenues.  Lower unemployment greater income tax revenues.

All achieved without going into debt.  A classic reminder to the electorate that rewarding enterprise creates wealth and retarding it with taxes just creates recession.