(Bloomberg) -- Australia’s inflation could be weaker than recent data showed because of lengthy intervals between the re-weighting of the consumer price index, central bank Deputy Governor Guy Debelle said.
Over time, households gravitate toward cheaper products and away from rising prices, but it takes a long time for the basket of goods in the CPI to adjust and reflect that change, he said in a speech prepared for delivery in Sydney Thursday.
“Because of substitution bias, history suggests that measured CPI inflation has been overstated by an average of 0.25 percentage point in the period between expenditure share updates,” Debelle said. “Going forward, the Australian Bureau of Statistics will update the expenditure shares annually, rather than every five or six years. This will reduce substitution bias.”
Data Wednesday showed core inflation unexpectedly slowed in the third quarter despite soaring power prices; moreover, there’s little prospect of a near-term acceleration as economists expect the re-weighting to shave 0.2-0.3 percentage point from CPI. The RBA targets annual inflation of 2 percent to 3 percent and neither the core or headline rates reached the lower level of that range.
“From a policy point of view, the inflation target is sufficiently flexible to accommodate the bias, given its relatively small size,” Debelle said.
The RBA has kept its key interest rate at a record-low 1.5 percent since August last year as it aims to boost confidence among firms and households. Policy makers sought to avoid further inflaming house prices by using macro-prudential policies that have helped slow property prices in Sydney. Traders are pricing in a more than 50 percent chance of a hike only in August 2018.
Debelle’s speech ranged across the uncertainties of forecasting inflation, economic growth and unemployment and said that interaction with companies and executives was helpful. “Of particular benefit is our business liaison program, which can give us an indication of whether wage and price pressures are starting to emerge in particular parts of the economy,” he said.
Australia is in the midst of a burst of hiring and unemployment has fallen to 5.5 percent from 5.9 percent in the past six months. Yet underemployment remains elevated. Meanwhile, the U.S., Germany and Japan are near or below full employment and still have subdued wage and price inflation.
“There still remains a sizable degree of spare capacity in the labor market,” Debelle said. “Our forecast is that spare capacity will be gradually reduced in the period ahead. But, as it is reduced, we will be alert to the possibility that these developments we see in other labor markets, in terms of subdued inflation in the face of minimal spare capacity, occur here too.”
In a question-and-answer session after the speech, Debelle reiterated that inflation and wages are expected to go up, but only gradually. Low wages and price outcomes are a global phenomenon and remain a mystery, he said.
On forecasts, the RBA deputy said there would be changes for key indicators in the quarterly Statement on Monetary Policy due out in November. Rather than providing ranges of, say, 2-3 percent for inflation, they will use forecasts to the nearest quarter point.
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