Welcome news yesterday with inflation easing in the September quarter.
The headline rate fell to a 0.6% rise (from 0.9% in the June quarter) with the annual rate of growth down to a 3.5% rate, from the 3.6% in the June quarter.
The news knocked the Australian dollar down half a cent and helped the stockmarket convert a down morning into an up afternoon and a gain of 16 points or 0.3%.
But that doesn’t necessarily mean we will get a rate cut next week from the Reserve Bank, even though the key measures of underlying inflation, the trimmed mean and weighted median did better than the headline rate.
Both measures rose by just 0.3% each in the quarter, producing an annual rate of 2.45%, safely inside the 2% to 3% inflation range that is the RBA’s target over time.
But that was the lowest quarterly rate of increase for these two measures since the December quarter in 1998 and reflects the reweighting and other changes in the CPI.
But despite that, it does give the RBA room to cut rates, if it sees the need.
However, other data suggests the economy has all but recovered from the impact of the flood shock in the first quarter.
The AMP’s chief economist Dr Shane Oliver though expects the CPI result to see the RBA cut rates.
"The benign September quarter underlying inflation result is consistent with our expectations for a cut in interest rates," he wrote yesterday.
"We expect a 0.25% cut in the cash rate taking it to 4.5% at next week’s RBA Board meeting. The benign inflation cut likely also paves the way for more rate cuts next year."
And the NAB’s chief economist Alan Oster agreed, writing late yesterday:
"The softer CPI outcome, and in particular the lower near-term outlook (our forecasts now have core inflation at 2.0 per cent in mid 2012), means that the RBA can relatively safely provide some near-term stimulus to the under performing interest sensitive sectors of the economy.
"That means that we now expect the RBA Board to cut rates next week. While it is likely that the RBA will cut again in early 2012 (February), we would caution that that is not a done deal," he said.
And a new inflation measure, the seasonally adjusted all groups, rose 0.4% in the quarter and 3.5% over the year, adding to the impression that inflation has weakened.
So the one thing we can say from the revamped and expanded Consumer Price Index for the September quarter is that there is no chance of a rate rise in the immediate future.
And we won’t be joining India where the central bank lifted interest rates on Tuesday for a 13th time in 19 months.
But like so many other countries, from Brazil, to the US, China and Israel, we are on the side of rate cuts, rather than rises: it is all a question of timing, and what is happening in Europe.
The moderation in headline inflation in the quarter was driven by falls in health prices (down 1.0%) reflecting seasonal declines in the price of pharmaceuticals, a fall in fruit and vegetables prices (down 1.8%) and falls in fuel prices (down 1.4%) reflecting easing world oil prices in the September quarter (which offset the fall in the value of the Australian dollar in the month).
Offsetting these price falls were increases in housing costs, accompanied by rises in recreation and culture, and clothing and footwear prices.
The ABS said that housing costs rose 1.9%, contributing around 0.4 percentage points to headline CPI, reflecting higher utilities prices and property rates and charges, as well as a rise in rents.
Recreation and culture prices also rose by 0.9%, contributing 0.1 percentage points to headline CPI, reflecting a strong seasonal rise in the price of international travel.
Clothing and footwear prices rose 1.5%, also contributing around 0.1 percentage points to headline CPI.
The revamped September quarter 2011 CPI introduces the 16th series of the CPI.
The 16th series review of CPI was the first review since 2005.
The September quarter release updates the household expenditure pattern and includes other major changes such as a new methodology for seasonal adjustment and the removal of the indirect component of the deposits and loans sub-index.
Those price rises which were worrying the RBA from April through August have gone and the big worry now for the central bank is the financial crisis and strains in Europe over the bailout of Greece and the recapitalising of European banks which continues to haunt global markets and central banks.
Australia had one rate increase, a year ago next month, when the cash rate was lifted 0.25% to 4.75%.
But minutes for the last three board meetings have shown a rapid escalation in the level of concern at the central bank about the strains flowing from Europe’s inability to control the crisis and bring about a lasting and convincing solution.
In fact Europe, and not the Australian economy, dominated the minutes of the October board meeting and produced a noticeable change in softening in attitude from the central bank.
But barring a dramatic breakthrough, there doesn’t seem to be any chance of a convincing agreement in Europe and there’s talk of a new meeting of eurozone finance ministers this weekend to get one nailed down.
So if financial markets tank and there is a massive loss of confidence in Euro
