Australia's Inflation Gets Boost From Higher Oil, Lower Currency

(Bloomberg) -- Australia’s inflation slightly exceeded forecasts in the three months through June as an earlier surge in oil prices filtered through the economy and a weaker currency showed some impact.

Consumer prices advanced 1.6% from a year ago and gained 0.6% from the first quarter, driven by a jump in fuel prices and a rise in overseas travel costs, data from the statistics bureau showed in Sydney Wednesday. Still, the core measures closely watched by the Reserve Bank mostly matched expectations.

“The recent weakening of the Australian dollar played a part, with international travel increasing,” said Sarah Hunter, head of macroeconomics at BIS Oxford Economics in Sydney. “With the headline rate now well below the RBA’s 2-3% target band, the data is very unlikely to alter the trajectory for the cash rate.” She forecasts another interest-rate cut in the fourth quarter and a potential further easing in “early 2020.”

The RBA has renewed its drive to return inflation to target, executing back-to-back rate cuts in June and July to try to drive down unemployment and force companies to offer higher pay. Like much of the developed world, Australia has struggled to generate price growth; its efforts have been further hampered by a government push to drive down costs ahead of an election.

The Aussie dollar is down more than 15% from its peak in January last year, reflected by tradables prices jumping 1.2% in the quarter. But non-tradables, which are affected by domestic variables, rose just 0.2% as the government’s campaign paid some dividends, with electricity prices edging lower.

While the currency impact is helpful, the effect isn’t as pronounced as in the past. Embattled retailers fending off fierce competition from global rivals have been loath to pass on higher costs to already stretched consumers. Moreover, the depreciation is unlikely to be prolonged with major economies adopting easing biases and the Federal Reserve expected to cut this week.

The Aussie dollar rose after the report and was trading at 68.98 U.S. cents at 3 p.m. in Sydney.

What Bloomberg’s Economists Say

“Looking ahead, there is still scope for inflation to return to the 2-3% target range by year-end. House prices are stabilizing and have potential to strengthen further in the second half due to supportive regulatory measures and RBA rate cuts.”

-- Tamara Mast Henderson, Economist
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The key driver of the rise in headline inflation was oil, which surged 27% in the first three months of the year before easing back a little in the second quarter. Crude’s impact takes time to work its way through the economy, demonstrated by fuel prices climbing from February through May, before falling back in June to reflect the global oil market.

“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 central bank. He cited “low wage growth and high rates of underutilization that have persisted for a number of years.”

The economy’s weakness was reflected in bank lending data released simultaneously with Wednesday’s inflation report. It advanced just 0.1% in June, with personal and business borrowing both declining, a worrying sign when growth has been weakening since the middle of last year.

--With assistance from 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, Chris Bourke, Victoria Batchelor

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