Australia Core Prices Slow to Record Low in Policy Challenge
Australia’s core inflation decelerated to the slowest pace on record as government programs lowered costs in the economy, highlighting the scale of the Reserve Bank’s challenge to reignite stronger price growth.
Annual trimmed mean core inflation eased to 1.1% in the first quarter, the weakest reading in a series dating back to 1983, versus an estimated 1.2% gain, the Australian Bureau of Statistics said in Sydney Wednesday. The gauge, the RBA’s preferred measure, advanced 0.3% from the final three months of last year, compared with economists’ estimates of a 0.5% rise.
“Core inflation is likely to remain weak for some time,” said Sarah Hunter, chief economist for BIS Oxford Economics. “Wages growth remains subdued and demand for many services is still recovering to pre-pandemic levels, which will limit any immediate pressures on prices.”
The Australian dollar slid after the release and was trading at 77.39 U.S. cents at 12:56 p.m. in Sydney. Australia’s 10-year bond yields erased earlier gains, while stocks advanced.
Compounding its challenge, the RBA recently adjusted its inflation framework to allow the economy to run a little hotter, saying it won’t raise interest rates until prices are actually -- not forecast to be -- sustainably within the 2-3% target. That’s likely to be a prolonged wait given both core inflation and wages are now hovering around record lows.
Governor Philip Lowe has said he doesn’t expect to raise rates until 2024 at the earliest, based on his expectation that wages will need to be rising by more than 3% on a sustainable basis in order to fuel faster inflation.
Today’s report showed the headline consumer price index rose 0.6% from the final three months of last year, compared with economists’ estimates of a 0.9% gain. It increased 1.1% from a year earlier versus an estimated 1.4% increase.
“The introduction, continuation and conclusion of a number of government schemes remained a factor in the March quarter,” said Michelle Marquardt, head of Prices Statistics at the ABS. “The fall in new dwelling prices was due to the impact of the Federal Government’s HomeBuilder grant and similar grants by the Western Australian and Tasmanian state governments.”
Lowe is not alone among central bankers struggling to rekindle consumer-price growth. His Japanese colleague Haruhiko Kuroda is set to fail to reach his goal of stable 2% price growth during his term after what will have been more than a decade of stimulus. In contrast, Canada last week accelerated its timetable for a possible rate rise as inflation gathered strength.
The RBA, like its U.S. and and European peers, maintains it will persist with stimulus as it tries to drive the economy toward full employment. The Federal Reserve has said it won’t scale back the pace of its $120 billion-a-month bond purchases until it sees “substantial further progress” on jobs and inflation.
Among global influences on local prices, crude oil recovered through the latter part of 2020 and the first few months of this year. Yet, a stronger Australian dollar might have helped curb some of the flow through to pump prices.
Today’s Australian inflation report showed tradables prices, which are typically impacted by the currency and global factors, rose 1.1% in the first quarter from the previous three months. Non-tradables, which are largely affected by domestic variables like utilities and rents, advanced 0.4%.
Other details in the report include:
- The most significant rises in the March quarter were automotive fuel jumping 8.7%, medical and hospital services up 1.5% and pharmaceutical products gaining 5.3%.
- A 7.3% rise in prices for accessories reflected high consumer confidence and demand for discretionary items, the ABS said
- Government programs saw 0.1% falls in new dwelling prices and a 1.7% drop in tertiary education
- Rents fell 1.4% from a year earlier, the largest annual fall on record for the series
The weighted-median gauge, another core measure, advanced 0.4% from the fourth quarter for an annual increase of 1.3%, compared with forecast rises of 0.5% and 1.3%, respectively.
The RBA meets Tuesday and is expected to keep its key policy instruments unchanged: the cash rate and three-year yield target at 0.1%; and a quantitative easing program involving A$5 billion ($4 billion) a week of purchases.
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