The spluttering half of Australia’s two-speed economy and the high dollar pushed inflation down to a statistical blip in the early months of the year.
The Australian Bureau of Statistics this week said consumer prices rose just 0.1% in the first quarter, while the annual rise was 1.6%.
Core inflation, which irons out one-off price movements, rose 0.4% in the quarter and by 2.2% annually.
This raised hopes the Reserve Bank of Australia (RBA) of a rate cut as early as next week.
The RBA signalled in early April that the non-mining economy had slowed and, if inflation proved weak, a case could be made to lower interest rates.
The official cash rate is 4.25%, among the highest in the world, and has been blamed for its rampaging dollar, which is around $US1.02-1.03.
The RBA ha s a 2-3% target band and its next policy meeting is on May 1. Virtually all commentators are expecting a drop by at least 0.25% or even 0.5%.
The depressed housing industry, in particular, is clamouring for a rate cut.
Large falls in food prices helped to contain inflation.
The cost of travel, accommodation, furniture and electronic equipment – most of which were influenced by the dollar’s value – were down.
Government spending is being wound back and nervous consumers have depressed retail sales, resulting in keener bargains for shoppers.
Commenting on the drop, Treasurer Wayne Swan noted a 30% drop in fruit prices – banana prices alone fell 60% during the quarter.
Growth projections
Deloitte Access Economics expects the two-speed economy will become more pronounced as mining investment goes into overdrive and consumer spending remains subdued.
It predicts the economy will grow by just 2.9% in the current financial year, well below official Treasury and Reserve Bank projections.
It is estimated that business investment will contribute 3.5% to GDP, meaning the economy would have shrunk without it.
The investment pipeline is worth up to $A180 billion, with most of the funds directed to major mining projects in Queensland, Western Australia and offshore liquefied natural gas operations.
The Access report predicts the non-mining economy will stay weak and the economy remains exposed to global volatility caused by the European sovereign debt crisis.
“Yet that doesn’t stop the overall outlook for growth – the one on which the [RBA] has to act – still looking rather better than most people realise,” director Chris Richardson said.
Mr Swan expects to announce a modest surplus of about $A1.5 billion when he unveils the 2012/13 budget on May 8.
“So May’s budget will forecast a surplus and now looks more likely to achieve it,” Mr Richardson said.
Dissident view
This has prompted at least one commentator to go against the consensus and hope the RBA sticks to its tough monetary stance.
Writing in The Australian, Adjunct Professor Richard Blandy, of the school of management at the University of South Australia, says the main reason the RBA should hold its ground is to demonstrate its independence from populist and political notions.
“To be seen to give in to government pressure in arriving at its decisions would damage expectations about the rational conduct of monetary policy in Australia,” he says.
“And the result would have damaging effects not only on investment and economic growth but on market interest rates.”
He points to the bullish international forecasts for the Australian economy for next year and beyond, as outlined in this column last week.
Mr Blandy says the economy should be allowed to continue its long-term restructuring toward export mining and away from import competing industries rather than go a for a short-term quick fix.
He says this means the level of unemployment at which inflation begins to rise is higher than it would otherwise be and the RBA, “being rational and professional, wisely takes this into account.”
He says the RBA’s policy appears tougher than it is actually is and that the central bank rightly fears the prospect of an inflationary breakout, mainly through higher wages and lack of growth in labour productivity.
The currency is also a factor.
“What has kept inflation down has been the rise in the exchange rate, which has kept down the prices of imported goods.
“If the exchange rate were to fall, this offset to domestically generated inflation would disappear and the rate of CPI inflation would probably rise dramatically.”
He concludes that the RBA should wait until the June 5 meeting before considering a cash rate cut because by then it will have the federal budget and will be better able to judge whether the surplus being forecast is likely to be real or illusory.
RBA was widely expected to lower interest rate by 25 basis points to four per cent next week with inflation remaining benign.
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