CANBERRA: Australia’s inflation is likely to have been contained in the first quarter of 2016, according to Societe Generale. This is because of the falling domestic energy prices and non-existent unit labour cost growth. But inflation is not expected to be too weak to increase worries and RBA’s monetary policy reaction.
The drop in retail petrol prices of more than 10% q/q is expected to have mainly driven the weakness in headline inflation. This will likely subtract around 0.4pp from the headline inflation. There is likelihood that food prices were also weak, given the food sales. “Overall, we expect the headline inflation rate to remain unchanged at 1.7% yoy”, said Societe Generale.
Nonetheless, core price pressures are expected to have been consistent with the central bank’s inflation target of 2%-3%, primarily because of the feed-through effects of weaker AUD, noted Societe Generale. The effect of AUD’s decline on consumer prices will be clear as currency hedges expire. In spite of AUD’s recent strengthening, the average rate of the Australian dollar was unchanged against the US dollar in Q1 and declined slightly by 0.1% in trade-weighted terms.
Moreover, the very small rise in housing costs in Q4 2015 is expected to be an understatement regarding the house prices and rents’ dynamics, according to Societe Generale. If both core measures record gains of 0.6%, the Q1 gain will be in the middle of the central bank’s 2%-3% target range. However, the year-on-year figure is likely to remain at the bottom of the range, said Societe Generale.
