SYDNEY: A limp rebound in inflation disappointed currency hawks looking for reasons to push up the Australian dollar further, strengthening the likelihood that interest rates will stay unchanged over the next year. While a surge in electricity prices had been flagged by economists as possibly sparking renewed momentum in inflation ahead of the data, sharper falls in vegetable prices resulted in a 0.6% rise in consumer prices on quarter and a 1.8% gain from a year earlier.
The Australian dollar slid around 0.6% following the result, which undershot expectations and poured cold water on hopes that an improved jobs market might budge the Reserve Bank of Australia out of its holding pattern on policy. Some economists see little on the horizon to nudge inflation back into the central bank’s 2%-3% target range, a prerequisite for higher interest rates. And with Amazon about to debut Down Under, a strengthening e-commerce sector is likely to add to downward pressure on retail prices. “There is no imminent RBA interest rate hike here,” said Shane Oliver, chief economist at AMP Capital. With inflation continuing to disappoint expectations, fears are growing that Australia has entered a period of entrenched low prices, with wages growth showing no sign of a rebound.
Craig James, chief economist at Commsec said the fall in the price of consumer goods is already significant, pointing to 28-year lows in the price of clothing and 30-year lows in the cost of cars. With structural forces biting, and wages growth at record lows, inflation could remain bottled, economists warn. “Broadly speaking the Australian economy appears to be locked in a low inflation environment,” said Justin Smirk, economist at Westpac. “At this stage we struggle to find any broad cyclical upswing in prices,” he said. Ben Jarman, economist at JP Morgan said persistently low inflation is a further sign that global reflation is skipping Australia. “The data remind us of Australia’s cyclical divergence from the rest of the world,” he said. Still, policy makers remain confident that recent strong employment growth will eventually trigger an uptick in wages growth and pump up inflation. Earlier Wednesday, Treasury Secretary John Fraser, who also sits on the board of the central bank, told parliament he remains confident wages growth will accelerate as unemployment falls, but stressed it “will take some time.” “We expect that a period of stronger growth and falling unemployment will lift wages in the next few years,” Mr. Fraser said.
