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Inflation surprises on the low side

Inflation surprises on the low side

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A massive surge in petrol prices and interest rate tightening have failed to offset a slump in inflation, with the latest readings revealing a surprise dip in prices.

The Consumer Price Index (CPI), the main gauge of inflation, edged up by a meagre 0.4 per cent in September quarter – mirroring the rise of the June quarter.

That meant overall inflation for the past year slowed to 1.9 per cent – back below the Reserve Bank’s official target of between 2 and 3 per cent.

It had picked up to an annualised rate of 2.1 per cent in the year to June 2018, only the second time it had breached the 2 per cent mark since September 2014.

“Annual growth in the CPI fell back below 2 per cent in the September quarter 2018. Modest rises in housing costs, including rents, utilities and property rates, and a fall in child care out-of-pocket expenses, saw a subdued rise in the CPI this quarter,” the ABS’ chief economist, Bruce Hockman, explained.

Prices were hardest hit in the communication sector, dropping by 4.3 per cent over the year. Furnishings and household equipment and services saw prices ease by 2 per cent, while clothing and footwear edged down by 0.8 per cent.

On the flip side, the strongest price growth over the past year was in alcohol and tobacco, up 6.8 per cent, followed by a 6 per cent rise in transport costs. Health costs rose by 3.2 per cent.

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Master Builders Australia – which represents property developers – said the result reflected weakness in the housing market.

“The pace of increase in rents remains at its slowest in 25 years,” its chief economist Shane Garrett said.

“Todays’ ABS inflation data show that over the year to September 2018, rents increased by just 0.6 per cent. The last time we saw a smaller increase in rental prices was back in late 1993.”

Adam Carr of the Australian Chamber of Commerce and Industry said the headline inflation figure masks the true cost pressures hammering businesses.

“While overall inflation might be low and certainly lower than the RBA would like, a 20 per cent-plus spike in petrol prices over the last year adds to the costs of businesses grappling with some of the most expensive electricity prices in the world,” he said.

“Today’s report serves as a reminder as to why policymakers need to take urgent policy action to help businesses survive and thrive, especially small and medium-sized business who lack the power to pass on price increases to their customers.”

Mr Carr added: “There is still much more work Parliament can do to help business, including short and long-term action on power prices, tax incentives for investment and access to the skilled workers they need to stay competitive.”

Low inflation makes a rise in official interest rates - already highly unlikely - even less of a possibility when the Reserve Bank board next meets on Melbourne Cup day next Tuesday, 6 November.

Inflation surprises on the low side
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