Tuesday, January 19, 2010

"Inflation's low, but we'll put up rates anyway"

That's how it will probably play out when this board meets on February 2

If the Reserve Bank board paid attention only to Australia's official inflation rate due for release next week it'd put up its feet and leave interest rates alone.

But the December quarter CPI, now expected to come in at just 0.1 per cent and 1.7 per cent for the year to December will scarcely figure in its calculations.

"It's the base, the starting point, but the board's job is to be forward looking,' says La Trobe University Professor Don Harding who has come up with the 1.7 per cent forecast for the Melbourne Institute.

"The board will look at it, see there's not much inflation in the system, say that's nice to know, but then say... the labour market is getting tight, retail sales looking strong, any number of indicators are looking strong and we probably think inflation is about to pick up."

The TD Securities - Melbourne Institute inflation gauge compiled using the same price sampling techniques as the the Bureau of Statistics index, but monthly and more cheaply is usually in step with the Bureau's. The Institute says it's accurate to five one-hundredths of on per cent.

Which puts Professor Harding in an odd position. He thinks he knows what the official rate will be next Wednesday, he thinks it will look benign, yet believes the Bank will crank up rates again anyway.

The detail of Wednesday's result is likely to look particularly encouraging. Of the 90 price groups surveyed by the Institute in December an impressive 48 stayed steady, 23 increased and 19 actually fell, hardly a sign of widespread inflation. Around half the prices measured hadn't moved in six months; around two-thirds hadn't moved in three months.

"By December we almost unwound all of the sustained increase in inflation pressure that had been evident in the Australian economy for several years," Professor Harding concludes in his report, before conceding to The Age/Herald that what will matter is where the Reserve Bank board believes inflation is going rather than where it knows it has been.

Other analysts managed to read an uptick in inflation into Professor Harding's report.

"After a period of clear disinflation over the year from mid-2008, inflation has now not only bottomed out, but early signals suggest some emerging upside pressure," said TD Securities economist Annette Beacher.

"The long period of disinflation has clearly ended," said CommSec economist Savanth Sebastian. "Price pressures though mild are once again rising."

Australia's most-recent official annual inflation rate for the September quarter is 1.3 per cent.

A jump to 1.7 per cent when the December quarter figures are released would see the rate remain below the Reserve Bank's 2 to 3 per cent target band.

Published in today's SMH  and Age 

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