Inflation rises higher than expected

Glenda Kwek
October 23, 2013
The Age

Inflation has risen strongly in the September quarter, boosted by petrol prices, international travel and property and utility rates, further reducing the odds of a Melbourne Cup day interest rate cut, analysts say.

The headline rate lifted by 1.2 per cent in the third quarter, higher than economists’ expectations of 0.8 per cent. The June quarter headline rate was 0.4 per cent.
The stronger-than-expected rise sent the Australian dollar to a new 4½-month high of 97.45 US cents.

Despite the rise in some third-quarter prices, the headline year-on-year inflation rate fell to 2.2 per cent and remained comfortably near the bottom of the Reserve Bank’s target band of 2 to 3 per cent.

Economists said weak demand in the domestic economy, an expected rise in unemployment and subdued wages growth would keep underlying inflation low. A continued run of soft data would in turn leave the door open for the RBA to ease monetary policy further next year if it was needed to boost the economy.

Financial markets were pricing in a 6 per cent chance of a cut to the cash rate in November, down from about 11 per cent last week Credit Suisse data showed.

“The lower exchange rate has pushed up imported inflation and capped the ability of the central bank to lower the cash rate further,” Moody’s Analytics associate economist Katrina Ell said.

The underlying inflation, a combination of the trimmed mean and weighted median measures and one which is more closely watched by the Reserve Bank, was 0.65 per cent quarter-on-quarter and 2.3 per cent year-on-year.

“We are still in an environment where prices are growing pretty softer. Cost pressures are moderate,” NAB’s head of Australian economics Rob Brooker said, adding that another RBA interest rate cut could be still on the cards.

“In underlying terms, we’re likely to see this sort of soft inflation environment for a little while to come.”

Another rate cut might still be possible

ANZ’s senior economist Riki Polygenis said the higher headline inflation rate could reduce the chances of another rate cut at the margins, especially if domestic economic data remains weak.

But she said the underlying figures were only marginally above the RBA’s own forecasts, with subdued services and labour costs, as well as the recent strength of the Australian dollar, likely to keep inflation contained.

“Our view that the RBA has most likely approached the end of the easing cycle rests more on the outlook for activity, with today’s inflation figures neither a justification nor a hindrance a for monetary policy changes,” Ms Polygenis said in a note.

Significant price rises
Petrol prices soared by 7.6 per cent in the September quarter. International travel rose by 6.1 per cent, electricity by 4.4 per cent and property rates and charged by 7.9 per cent. Water and sewerage grew by 9.9 per cent while domestic travel prices increased by 3.5 per cent.

The Bureau of Statistics added that domestic and international travel costs increased due to the rise in airfare prices.

In contrast, vegetables prices dropped by 4.5 per cent.

Inflation rose by 1.2 per cent from July to September in Sydney, by 1.4 per cent in Melbourne and by 1.3 per cent in Brisbane. It lifted by 1.4 per cent in Adelaide and 1.2 per cent in Perth.

Price rises in Hobart, Darwin and Canberra were slightly more moderate. Prices rose by 0.9 per cent in Hobart and Darwin and by 0.6 per cent in Canberra.

In the tradeables segment, which consists of goods that have prices determined on the world markets, inflation rose by 1.2 per cent for the September quarter, driven by petrol, fruit and tobacco price rises. The strength of the Australian dollar has kept tradeables inflation low, but the currency’s weakness between April and August was expected to lift prices in this component for the quarter.

The non-tradeables component – goods and services that have to be consumed where they are bought – saw a 1.1 per cent rise for the quarter on the back of higher electricity, water and sewerage costs.