Inflation is expected to have eased slightly in the September quarter in Wednesday’s consumer price index (CPI), but there still could be room for the central bank to raise interest rates by as much as half a per cent, according to some economists.
The September quarter CPI is expected to be a major influence on the Reserve Bank of Australia’s Melbourne Cup day board meeting on November 3.
AAP said Friday that a survey of economists saw expectations of an 0.9% rise in the CPI in the quarter, for a pace of 1.2%.
And some of those surveyed didn’t rule out the RBAS making a pre-emptive strike of 0.50%.
Rents, petrol prices and housing were expected to be the main reasons behind the September quarter rise.
Food prices were likely to have been flat, with the cost of fruit and vegetables falling in the quarter.
Woolworths reported last week that food price inflation in the first quarter was 2.1% (Q1 2009: 3.2%), significantly down on the 4.0% reported at Q4 2009.
Coles reported it had zero food price inflation.
The CPI rose 0.5% in the June quarter, and was up 1.5% from the a year ago, thanks to the fall in oil and petrol prices over most of the year.
Things changed in the September quarter.
The RBA said in the minutes of its October board meeting that inflation was expected to decline in the near term, but less than previously forecast.
"Keeping interest rates at very low levels for an extended period could therefore threaten the achievement of the inflation target over the medium term," the minutes said.
In terms of monetary policy, the RBA’s focus is the underlying measures of inflation – the weighted median and trimmed mean – which reduce the impact of price volatility and some volatile items from its inflation calculations.
Economists believe the average of the two measures rose 0.7% in the September quarter for an annual pace of 3.45%.
Underlying CPI rose 0.8% in the June quarter, and by 3.9% over the year to June.
The AMP’s Dr Shane Oliver forecast an 0.6% rise in headline inflation which will take the annual rate of inflation down to just 0.9%, from the 1.5% annual rate in the June quarter.
"The underlying measures of inflation are likely to have increased 0.5% which will take their annual rate down to 3.2%," he wrote on Friday.
"This is still above target though and probably won’t be enough of an improvement to prevent another interest rate hike in November."
Cost pressures are easing though as figures out Friday confirm (and the Producer Price figures out today.
On Friday the Australian Bureau of Statistics revealed a 9.6% fall in the Export Price Index for the September quarter and a 20.7% drop for the year to September.
The Import Price Index fell 3.0% for the September quarter and 2.3% for the year to September, indicating all and more of the decline was concentrated in the three months ending September 30.
In fact, helped by a combination of sharply lower contract prices for coal and iron ore, plus the impact of the rising Australian dollar, the 20.7% plunge in the export index in the year to September was the largest recorded since the Bureau of Statistics measuring it in 1974.
The 9.6% fall in the third quarter was after a 20.6% drop in the previous quarter, with the fall in contract prices for iron ore and coal the major reasons. In the latest quarter it was the dollar.
The dollar, which is up 62% since the lows of early February so far this year against the US dollar and up more than 30% on a trade weighted index, has already starting hurting exporters, such as mining companies, rural shippers and manufacturers. It was trading around 92.80 US cents just before midday.
The ABS said the fall in import prices "was driven mainly by the appreciation of the Australian dollar against all major trading currencies, as well as lower prices paid for general industrial machinery and equipment, and machine parts, -7.4%.
"These falls were partly offset by rises in prices paid for petroleum, petroleum products and related materials (+15.1%).
"The fall in the export price index was driven mainly by falls in prices received for coal, coke and briquettes (-34.2%) and metalliferous ores and metal scrap (-12.1%), as well as the appreciation of the Australian dollar against all major trading currencies."
The ABS said the 20.7% fall in the Export Price Index was "the largest annual decrease since the current series began in September quarter 1974".
The drop in export prices saw the terms of trade, or what Australia gets for exports compared to what it pays for imports, fall a further 7% in the quarter. The terms of trade fell 15% in the second quarter.
The RBA says the terms of trade remain at a very high levels due to a strong recovery in Asia, and particularly China, which is supporting demand for commodities and prices.
Australia’s terms of trade had climbed by around 33% in 2008 to a record high, thanks to the resources boom, especially the huge price increases for coal and iron ore.
But the higher value of the Aussie dollar will clip those prices rises.
