Business economists and other ‘experts’ were left with egg on their faces yesterday after they completely missed the surprise dip in inflation in the March quarter.
The market had been looking for a rise of 0.2% (after the 0.4% rise in the December quarter), but that wasn’t to be as the March quarter Consumer Price Index stunned with a fall of 0.2%
It was the first quarterly fall in inflation in seven years and took some measures of inflation to either 20 years, or the lowest they have been – in the case of the Reserve Bank’s core measures of Trimmed mean and Weighted Median.
The 0.2% dip saw the annual rate drop to 1.3% from 1.7% in the year to last December, and the Aussie dollar fall by more than a cent to around 76.30 US cents. (So much for those forecasts for the dollar to surge to 80 cents.)
Now these are the headline numbers, the ones the Reserve Bank focuses on – the Trimmed Mean and Weighted median (core inflation) also saw big falls.
The average for both fell to 0.15% from 0.55% in the December quarter and the average annual rate fell to 1.55% from 2%, well below the 2% to 3% target rate. It was the lowest reading for both measures since they were introduced in 1983.
Clearly there are no cost pressures in an economy enjoying its strongest growth for three years.
The Australian Bureau of Statistics said in a statement the fall in the March quarter was “broad based, with six out of the eleven CPI groups recording a fall for the quarter. The most significant fall occurred in transport (–2.5 per cent), due to automotive fuel (–10.0 per cent) falling for the third consecutive quarter.” The cost of recreation, culture, international holiday travel and accommodation and the cost of food and non-alcoholic beverages also fell, with a 11.1% slide in the cost of fruit. Rises were all seasonal for the start of the year – secondary education, medical and hospital and pharmaceutical products.”
The fall in the headline rate is not deflation (as some analysts claimed yesterday and this morning because core inflation is still positive) it is disinflation and it will be a niggle for the RBA ahead of next Tuesday’s board meeting for May.
According to some economists (who missed the dip) the weak reading is the fault of the RBA and means it will be more likely to cut its cash rate.
But with the highly political Federal budget out the same day and the country heading to a long and bitter election campaign, the central bank will be hesitant to do anything dramatic, unless it sees the need to do so.
The AMP’s Chief Economist Dr Shane Oliver says the price falls were broad based last quarter – particularly in areas like furnishings and household equipment, clothing, communication, electronic goods and holiday travel.
“While tradeable inflation was -1.4% quarter on quarter (qoq) or 0.6% year on year (yoy), non-tradeable inflation was also very weak at just 0.4% qoq or 1.7% yoy.
"The clear message is that pricing power in the Australian economy is very weak reflecting weak demand growth. It’s doubtful that the recent bounce in the $A had much impact on the March quarter inflation outcome as the bounce really only started in March which is a bit too late to have much impact,” he wrote yesterday.
“It would be dangerous to extrapolate from the fall in the March quarter CPI and conclude that Australia is now at risk of deflation on an annual basis, because the plunges in petrol and fruit prices are unlikely to be sustained.
"However, both headline and underlying inflation are now running well below the RBA’s target range of 2 to 3%. While this is not a problem for short periods, the risk is that thanks to a combination of deflationary pressures globally, soft demand domestically and very weak wages growth inflation could remain well below target for an extended period.
"This is a risk that the RBA cannot ignore and as a result we remain of the view that the RBA will cut interest rates again in the months ahead. While we had virtually given up on a cut at its May meeting next week after recent solid jobs data, there is now a reasonable chance that it may move next Tuesday,” Dr Oliver said.
