Australia | Jun 27 2006
Greg Peel
Anyone who’s done a bit of grocery shopping lately will probably agree with the call I made to my own household recently that the next CPI figure will show a significant increase. Bananas aside, a trip around the fruit&veg or meat aisles will reveal that the high cost of fuel has begun to be passed on.
Commonwealth Research chief economist Michael Blythe aggrees, suggesting the second quarter CPI figure is "shaping up as a shocker". Other than groceries, annual health insurance increases will chime in to produce a figure of potentially 1.2%, says Blythe. This will take the annual headline inflation rate to 3.6%, but Blythe suggests the underlying rate will remain within the RBA’s comfort zone at 2.8%.
Blythe notes the Australian market has currently set a 50/50 bet on a rate increase in August.
The RBA has forecast underlying inflation to be 2.5-3.0% over the next 12 months. To stay within the range, the outcome requires trend growth, a stable unemployment rate and no lift in wages growth, notes Blythe. The first two boxes are ticked, leaving wages as the major domestic risk.
Blythe notes the latest data suggest the pressure on wages has eased. The number of "big" pay rises has dropped sharply and productivity growth is rising.
On the global front, oil is the key but high levels of global excess capacity still exist, and this has put a dampener on further oil price surges, Blythe suggests. In the meantime, Australian households and businesses are diverting money away from other sources to cope with petrol costs, and will continue to do so if oil continues to rise.
Blythe’s conclusion is that on a fundamental basis, it is hard to justify another RBA interest rate hike. The caveat is, however, that the RBA likes to lead the numbers rather than lag them, so an "insurance" rate rise is not out of the question. Nevertheless, CommBank’s stance is for no hike at this stage.