Australia’s Core Inflation Stays Weak Despite Currency Slump

(Bloomberg) --

Australia’s core inflation remained sluggish in the third quarter as the economy absorbed much of the currency’s depreciation, highlighting policy makers’ challenge in reigniting prices.

The trimmed-mean gauge, a key core measure, advanced 1.6% from a year earlier, matching estimates and below the bottom of the Reserve Bank of Australia’s target, data from the statistics bureau showed in Sydney Wednesday. Tradables prices, generally influenced by the currency and other global factors, rose just 1.2% from a year earlier.

RBA chief Philip Lowe has cut interest rates three times since June as he tries to encourage hiring in a bid to drive wage gains and faster inflation. Yet he’s facing strong headwinds: jobs are being filled by new labor market entrants, while government efforts to contain costs like electricity are paying dividends and weak household spending is also helping keep a lid on prices.

“Low inflation speaks to deep underlying problems in the Australian economy,” said Callam Pickering, an economist at global jobs website Indeed, who previously worked at the RBA. “Problems such as low wage growth and high rates of under-utilization have persisted for a number of years.”

The Australian dollar was little changed after the release, trading at 68.62 U.S. cents at 1 p.m. in Sydney.

Lowe’s rate cuts are helping keep pressure on the Australian dollar, which is down more than 15% since early last year, aiding exporters and increasing the price of imports. But embattled retailers already fending off fierce competition from global rivals have been loath to pass on higher prices to already stretched consumers.

The RBA, which targets inflation of 2%-3% over time, resumed lowering borrowing costs after an almost three-year hiatus. It has now cut the cash rate to 0.75% in part to help contain the Aussie dollar at a time when major counterparts -- from the Federal Reserve to the European Central Bank -- are similarly easing.

Oil Slump

Inflation last quarter was led by a 6.1% jump in the cost of international holiday travel and accommodation -- reflecting the weaker currency -- and a 3.4% increase in tobacco prices as the government keeps raising taxes. Fuel led the declines, dropping 2%, as the global oil price slid almost 9% over the period. Fruit and vegetables also fell, 3.1% and 2.5%, respectively, despite an ongoing drought.

Limited pay rises Down Under have removed traditional “wage-push” factors from inflation. The RBA is trying to reverse this trend by tightening the labor market sufficiently to force employers to offer higher salaries to attract employees.

The central bank has struggled to get inflation even to the bottom of its target for almost half a decade now.

Lowe said Tuesday evening that he’s prepared to ease further if needed, adding that households should expect a prolonged period of low borrowing costs. Policy makers estimate the cash rate’s lower bound is around 0.25%-0.5% and as a result economists are increasingly discussing the likelihood of unconventional measures in Australia.

The RBA’s board meets Tuesday to decide on interest rates and traders are pricing in little chance of a move, expecting it to watch and wait to see how its earlier easing flows through the economy.

--With assistance from Garfield Reynolds and Tomoko Sato.

To contact the reporter on this story: Michael Heath in Sydney at mheath1@bloomberg.net

To contact the editors responsible for this story: Nasreen Seria at nseria@bloomberg.net, Edward Johnson

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