Inflation expected to remain benign in Dec

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Inflation figures this week aren’t expected to stop the Reserve Bank of Australia from cutting the cash rate but the falling Australian dollar might.


The consumer price index (CPI), the key measure of inflation, is forecast to have risen by 0.5 per cent in the three months to December, for an annual rate of 2.5 per cent, an AAP survey of 14 economists shows.

Inflation came in higher than expected in the September quarter at 1.2 per cent – economists had forecast a quarterly rise of 0.8 per cent – driven by rising house prices.

Another unexpectedly high figure in December could see the end of the RBA’s easing bias while a lower-than-expected figure could spur another cash rate cut when the RBA board meets in February, JP Morgan chief economist Stephen Walters said.

“The easing bias is there. I think it would take a reasonably significant surprise on the upside to get them to change tack,” Mr Walters said.

“They’ve made it pretty clear that they’re still willing to cut if they need to, but they’ve also made it pretty clear they want the currency to do most of the work and that is starting to happen – we’ve got the currency below 88 US cents.

“If inflation comes in high, it could be enough to take out the easing bias. But, if it comes in lower, then they could easily cut again in a couple of weeks’ time.”

Although the currency had drifted lower, it was too soon to see the effects in Wednesday’s inflation figures, Mr Walters said.

“There’s a lot of disinflation in this quarter – pharmaceutical prices have come off, car prices, petrol prices came off – so there’s still some effects from the high Aussie dollar coming through,” he said.

“We still think inflation, in core terms, will be tracking in the lower half of the RBA’s target range over the next 12 months. There will be some impacts of the currency having gone down in there but not much, because of the lack of pricing power.”

HSBC chief economist Paul Bloxham said inflation was expected to remain benign but not low enough to see the RBA consider any near-term rate cuts from the current record low of 2.5 per cent.

“We think inflation has probably passed its trough and the RBA is likely to remain on hold,” he said.

“The big focus for the RBA has been on the currency in recent months and they got their Christmas wish, the currency is down at the sorts of levels that the RBA governor was hoping it would be.

“I suspect that they are going to be quite happy that the currency is doing a lot of work for them.”

The median forecast for underlying inflation, which excludes volatile price movements, is 0.6 per cent in the December quarter and 2.3 per cent over the year to December.

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