Thursday, April 25, 2013

It is possible for inflation to fall too low. It has - Swan

So low has Australia’s rate of inflation fallen that the Treasurer is worried and the Reserve Bank is rethinking the economic outlook.

Australia’s quarterly rate came in at just 0.4 per cent in the March quarter. In the six months to March following the one-off jolt to prices from the introduction of the carbon tax, prices climbed just 0.6 per cent. Annualised, the six-month inflation rate is just 1.2 per cent.

The only substantial price increases in the March quarter were usual jump in recorded pharmaceutical prices after each December’s expiry of the Medicare Safety Net and the January increase in school fees. Even those increases were well below those of the year before, pushing the Bureau of Statistics’ calculation of Australia’s seasonally adjusted inflation rate down to just 0.1 per cent.

“The high dollar is weighing on prices,” said Treasurer Wayne Swan. “And the flipside of the high dollar weighing on prices is that this is putting immense pressure on the profitability of many businesses, large and small, right across our economy.”

Mr Swan said said Australia was probably in the grip of deflation.

“Price growth for domestic goods and services, which is a broader group of prices than to the consumer price index has generally been much weaker than the CPI we are seeing today. Quarterly growth in the prices for all goods and services in our economy as measured by the GDP deflator has been negative in four of the past five quarters.”

“Just as the high dollar is affecting the profitability of businesses, it's also having a very big impact on government revenues across the forward estimates, largely through the impact on profits and prices.”

“This sustained hit to revenues means we're going to have to make some difficult and tough decisions in this year's Budget, but Labor's choice will be to support jobs.

One of the surprises in the March quarter was that so-called imported inflation remained low even though the dollar scarcely climbed...

“Theoretically, tradable deflation can only continue if the Aussie dollar keeps on rising,” said Commonwealth Bank senior economist Michael Workman.

“But while the Aussie dollar did not appreciate significantly over the first quarter tradables deflation continued. It seems like the effects of a high currency are being drawn out, international exporters are discounting their prices and as a result domestic retailers are discounting their stock more than usual."

Sales figures for Woolworths show its average food and liquor prices slipped 2.5 per cent in the March quarter after sliding 2.8 per cent in the December quarter. Coles prices fell 1.3 per cent.

The Reserve Bank sees the lower-than-expected inflation as a sign that retailers are cutting prices in order to keep consumers spending.

The Bank is updating its view of the economy in the wake of the figures and will present a somewhat more downbeat view to its board at its May meeting to be held one week before the budget.

Futures trading lifted the likelihood of a rate cut at the May meeting from 31 per cent to 44 per cent.

“The chance of a further cut in May has clearly increased,” said BT Financial Group economist Chris Caton. “It may now be close to 50-50.”

“What we find out in the next two weeks, about both the Australian economy and the rest of the world, could tip the balance.”


Prices in the three months to March

Bread: Down 0.3%
Milk : Down 1.5%
Eggs: Down 0.1%
Clothes: Down 3.3
Furniture: Down 6.8%
Motor vehicles: Down 1.3%


Rents: Up 0.8%
Electricity: Up 2.4%
Petrol: Up 1.2%
Transport fares: Up 3.3%

ABS March quarter consumer price index

In The Sydney Morning Herald and The Age

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