The inflation rate for the June quarter rose 0.5 per cent, taking down the annual rate to a meagre 1.2 per cent–the lowest for 13 years—and leaving ample room for the Reserve Bank of Australia (RBA) to make further rate cuts.
Treasurer Wayne Swan welcomed the news, saying that the low inflation is an “impressive achievement against a backdrop of strong growth, low unemployment, healthy consumption and a huge pipeline of investment in the resources sector”.
The big price increases in the June quarter, according to ABS data released last week, included medical and hospital services up 2.8 per cent, rent prices increasing 1.1 per cent, vegetable prices rising 5.2 per cent, and furniture prices moving up 4.5 per cent.
These price increases were partially offset by falling prices of domestic holiday travel and accommodation, dropping 4 per cent; audio, visual and computing equipment falling 3.8 per cent; and cakes and biscuits falling 2.8 per cent this quarter.
Of course, these figures are only for the last 3 months and do not reflect the entire situation of the economy. For that we need to look at the annual figures.
The new annual inflation rate of 1.2 per cent reflects the dramatic fall in food and drink prices, down 3.2 per cent since last year, including a mammoth 21.9 per cent fall in fruit and vegetable prices, and falls in other staples such as bread and milk.
Other goods and services also remained relatively benign over the year, contributing to low inflation. Furniture only added 0.7 per cent, clothing and footwear moved up only 0.6 per cent, and recreation and culture products actually decreased in price by 1.6 per cent.
It is definitely a good time to be a consumer (what’s all this fuss about the rising costs of living?). But it isn’t all good news.
Housing prices again posted modest figures, rising only 0.1 per cent over the June quarter and 0.2 per cent over the year–as has been the story over the last five years. This has impacted the perceived wealth of Australians and contributed to poor consumer sentiment.
“The modest housing inflationary pressures are the bedrock for why we believe that core inflation can remain at the bottom of the RBA’s target band,” said Justin Smirk, Senior Economist at Westpac.
The high exchange rate has brought out another concerning issue—the gap between imported goods (tradeables) and domestic products (non-tradeables). With the high dollar, the price of imports has fallen by 2 per cent, while our domestic goods and services have risen 3.3 per cent.
Overall, the low inflation has opened the door for the RBA to cut rates again. However, having already cut rates by 0.75 basis points this year, the RBA will be more likely to wait and see before lowering rates, sometime from late this year to early 2013.
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