Headline inflation slows yet RBA rate cuts to wane - economists
By Ed Logue22 Apr 2009 3:46 PM
SYDNEY, April 22 AAP - Underlying inflation remained high during the March quarter despite a slowdown in the headline rate and will have the central bank considering a pause on interest rates next month, economists say.
The Reserve Bank of Australia's (RBA) focus is on the underlying measures of inflation - the weighted median and the trimmed mean - which exclude volatile prices from CPI calculations.
Headline inflation, as measured by the consumer price index (CPI), rose 0.1 per cent in the March quarter, the Australian Bureau of Statistics (ABS) said on Wednesday.
On a yearly basis, headline inflation rose by 2.5 per cent, down from 3.7 per cent in the December quarter and half the pace posted six months ago.
March's result was below market forecasts of a 0.5 per cent quarterly rise in headline inflation for a yearly pace of 2.9 per cent.
Leading the increase in inflation were secondary education fees, up 7.6 per cent, the prices of vegetables rising six per cent and pharmaceutical costs, which were 13 per cent dearer.
JP Morgan economist Helen Kevans said a sharper than expected fall in deposit and loan facilities, down 14.1 per cent in the quarter, and a 8.1 per cent drop in the price of fuel curbed the rise in headline inflation.
"Excluding the financial and insurances services component, of which deposit and loan facilities make up 4.5 per cent, the CPI would have risen a solid 0.8 per cent quarter on quarter (or 2.8 per cent on yea -ago) in the March quarter."
Underlying inflation rose 1.1 per cent in the March quarter for an annual pace of 4.15 per cent, down from a yearly rate of 4.35 per cent for the December quarter.
The RBA's target band for underlying inflation is two to three per cent.
RBC Capital Markets senior economist Su-Lin Ong said the high rate of underlying inflation would ease back within the RBA's comfort zone within a year.
"The emerging slack in both the goods and labour markets as Australia sinks into recession will take some time to exert more broadbased downward pressure on prices, but we continue to expect core inflation to move lower over the next 18 months," Ms Ong said.
"Indeed, it is likely to be back in the RBA's target range by late 2009/early 2010."
St George treasury economist Amanda Tan said the RBA would keep cutting interest rates due to a weak economy and rising unemployment, although at a moderate pace.
"The RBA remains focused on the risks to the growth outlook," Ms Tan said.
"But the fact that core inflation is taking longer to moderate indicates that the RBA will likely tread the rate-cutting path more cautiously."
Ms Kevans forecasts the RBA to cut the cash rate, currently a 49-year low of three per cent, by 25 basis points in August.
"Waiting until August would allow the RBA time to assess the impact of the significant amount of policy stimulus already delivered," Ms Kevans said.
