Australia Consumer Prices Fall as Deflationary Pulse Emerges

Australia slipped into deflation in the three months through June, reflecting a combination of cheap oil and government intervention to pause some service charges in order to nurse households through the Covid-19 lockdown.

The consumer price index fell 1.9% from the first quarter, compared with economists estimates of a 2% drop, the biggest decline in 72 years, data from the Australian Bureau of Statistics showed Wednesday. Annual CPI slid 0.3%. The trimmed-mean gauge, a key core measure, declined a quarterly 0.1% for an annual increase of 1.2%, compared with forecast gains of 0.1% and 1.4%, respectively.

Australia Consumer Prices Fall as Deflationary Pulse Emerges

“Since 1949, this was only the third time annual inflation has been negative,” said Bruce Hockman, chief economist at the ABS. “The previous times were in 1962 and 1997-98.”

The data span the shuttering of large swathes of Australia’s economy that prompted the government to introduce free child care and caps on administered prices to help Australians through the crisis. An earlier geopolitical struggle that led to a plunge in oil prices was compounded by a collapse in demand during the lockdown in large parts of the developed world.

The inflation report showed tradables prices, which are typically impacted by the currency and global factors, fell 1.3% in the second quarter from the previous three months. Non-tradables, which are largely affected by domestic variables like utilities and typically contribute to underlying inflation, dropped 2.3%.

The Australian dollar edged down following the release before trading little changed at 71.63 U.S. cents at 12:10 p.m. in Sydney. It soared almost 13% in the second quarter, retracing almost all of its losses in the first three months of the year that reached a nadir in March during the peak of virus-induced market turmoil.

Other details in the report include:

  • The decline in consumer prices was mainly the result of free child care, plummeting 95%, and a fall in pre-school and primary education, down 16.2%
  • The cost of fuel plunged 19.3% on tumbling global oil prices
  • Price rises came on the back of increased spending during the lockdown, with cleaning and maintenance products spiking 6.2% and other non-durable household products, including toilet paper, rising 4.5%
  • Food and non-alcoholic beverages rose 0.5% as high demand saw a reduction in specials being offered

What Bloomberg’s Economists Say

“Within the details of Australia’s temporary deflation dive lies a portrait of how the pandemic and policy responses to it are reshaping economic activity. Free-falling oil prices and free child and school-based care are temporary forces, which overwhelmed demand-driven increases as spending shifted to supermarkets, lockdown spending and work from home provisioning.”

James McIntyre, economist

The ABS accounted for goods and services it couldn’t measure due to the lockdown by imputing them from the headline CPI quarterly movement. This was applied to urban transport fares; domestic holiday travel and accommodation; international holiday travel and accommodation; sports participation; and other recreational, sporting and cultural services, it said.

The weighted median gauge, another core inflation measure, rose 0.1% in the quarter for an annual increase of 1.3%. Economists had predicted 0.1% and 1.4% increases, respectively.

The Reserve Bank of Australia, which targets inflation of 2%-3% over time, has focused its attention this year on combating the fallout from the pandemic, which has tipped the economy into its first recession since 1991. In March, it cut the cash rate to the effective lower bound, set a target of 0.25% for the three-year government bond yield and injected liquidity into the financial system.

In the central bank’s May quarterly update, it forecast a 1% drop in headline inflation for the 12 months through June. It expects inflation to gain momentum in subsequent quarters along with the economy’s recovery.

©2020 Bloomberg L.P.

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