Local Inflation Benign

By Glenn Dyer | More Articles by Glenn Dyer

There was absolutely nothing in yesterday’s inflation figures to force the Reserve Bank’s hand on interest rates at its first meeting for the year next Tuesday.

And the slight rise reported meant absolutely nothing as well. In fact, attempts by some in the markets to hint at something more important in that rise than was actually in the report fell flat and an early surge in the value of the Australian dollar petered out before it could go anywhere.

Of greater importance was the curious case of the local share market sell-off in the face of strong rises in Tokyo and some other Asian share markets.

That was even as the Shanghai market fell for a second day in a low, losing more than 2.4% on top of the 6.4% slide on Tuesday. The slide in Shanghai eased and the market ended the day down around half a per cent.

Did some silly investors panic at the news of the 0.4% rise in the Consumer Price Index in the December quarter? That was just above market forecasts for a rise of 0.3% (and why was that important when they were forecasts from people who mostly get their forecasts wrong?)

The quarter on quarter rise of 0.4% put the annual rate of inflation at 1.7%, while the policy-important core inflation rate (that’s the one the Reserve Bank watched closely) was 2%, which is at the bottom of the RBA’s 2%-3% (over time) target band.

Inflation under control

A 7.4% rise in tobacco was the main factor pushing up price rises, following a federal excise tax increase last September. Seasonal rises in domestic holiday travel and accommodation also boosted inflation, rising 5.9% in the quarter.

These were partially offset by a 5.7% fall in fuel prices, and a 2.4% dip in telecommunications costs.

The AMP’s chief economist Dr Shane Oliver said in a note yesterday that the “December quarter inflation was in line with RBA forecasts (and) it is probably not low enough to bring on another rate cut from the RBA on its own.

“But with inflation running at the bottom of the 2-3% inflation target it leaves plenty of room for another rate cut and helps reinforce the RBA’s easing bias,” he wrote.

“While the RBA may not be ready to cut the cash rate again next week our assessment remains that the ongoing downside risks to growth, further falls in commodity prices and global growth uncertainties along with low inflation will see the RBA cut rates again at some point in the next few months.

"Market pricing continues to allow for at least one more rate cut over the year ahead,” Dr Oliver added.

About Glenn Dyer

Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.

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