Base prices in Australia slow to record low policy challenges

(Bloomberg) –

Australia’s core inflation slowed to the slowest rate on record as government programs slashed costs to the economy, underscoring the scale of the Reserve Bank’s challenge to kick-start stronger growth in price.

Reduced annual average core inflation fell to 1.1% in the first quarter, the lowest reading in a 1983 series, from an estimated gain of 1.2%, the Australian Bureau of Data said on Wednesday. statistics in Sydney. The gauge, the RBA’s preferred measure, rose 0.3% from the last three months of last year, compared to economists’ estimates of a 0.5% increase.

“Core inflation is likely to remain low for some time,” said Sarah Hunter, chief economist for BIS Oxford Economics. “Wage growth remains subdued and demand for many services is still recovering to pre-pandemic levels, which will limit immediate price pressures.”

The Australian dollar slipped after the release and was trading at 77.39 US cents at 12:56 p.m. in Sydney. Australia’s 10-year bond yields erased earlier gains, while stocks rose.

To compound its challenge, the RBA recently adjusted its inflation framework to allow the economy to run a bit warmer, saying it won’t raise interest rates until prices actually go – not planned – sustainably within the target of 2-3%. The wait will likely be extended as core inflation and wages now hover around record lows.

Gov. Philip Lowe has said he does not expect to hike rates until 2024 at the earliest, as he expects wages to rise by more than 3% on a sustainable basis in order to fuel inflation faster.

Today’s report showed that the overall consumer price index rose 0.6% from the last three months of last year, compared to economists’ estimates of a gain of 0 , 9%. It rose 1.1% from a year earlier against an estimated increase of 1.4%.

“The introduction, continuation and termination of a number of government programs remained a factor in the March quarter,” said Michelle Marquardt, head of price statistics at ABS. “The drop in new home prices was due to the impact of the HomeBuilder grant from the federal government and similar grants from the state governments of Western Australia and Tasmania.”

The story continues

Global factors

Lowe is not alone among central bankers struggling to revive consumer price growth. His Japanese colleague Haruhiko Kuroda will fail to meet his target of stable 2% price growth during his tenure after what will have been more than a decade of recovery. In contrast, last week Canada accelerated its timeline for a possible rate hike as inflation rose.

The RBA, like its US and European counterparts, maintains it will persist in its stimulus efforts as it attempts to drive the economy toward full employment. The Federal Reserve has said it will not reduce the pace of its bond purchases by $ 120 billion per month until it sees “further substantial progress” on jobs and inflation.

Among the global influences on local prices, crude oil recovered through the end of 2020 and the first months of this year. Still, a stronger Australian dollar could have helped dampen some of the flow to prices at the pump.

Today’s Australian inflation report showed that tradable goods prices, which are typically affected by currency and global factors, rose 1.1% in the first quarter compared to the previous three months. Non-tradable goods, which are largely affected by domestic variables such as utilities and rents, advanced 0.4%.

Other details of the report include:

The largest increases in the March quarter were an 8.7% increase in motor fuel, a 1.5% increase in physician and hospital services, and a 5.3% increase in pharmaceuticals. of 7.3% of accessory prices reflects high consumer confidence and demand for discretionary items, ABS said. programs saw a 0.1% drop in new home prices and a 1.7% drop in higher education Rents were down 1.4% from the previous year, the largest annual drop never recorded for the series

The weighted median gauge, another core metric, rose 0.4% from the fourth quarter for an annual increase of 1.3%, compared to planned increases of 0.5% and 1.3%, respectively .

The RBA is meeting on Tuesday and is expected to keep its main policy instruments unchanged: the cash rate and the three-year yield target at 0.1%; and a quantitative easing program involving A $ 5 billion ($ 4 billion) per week in purchases.

(Updates with the economist’s comment in the third paragraph.)

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