Australia | Mar 31 2008
By Chris Shaw
There seems no short-term end in sight to Australia’s inflationary pressures judging by the latest monthly reading from the TD Securities – Melbourne Institute Monthly Inflation Gauge, which rose by 0.4% in March after a 0.3% increase in February.
For the year to March the Inflation Gauge matched the year to February outcome with a 4.0% increase, marking the first time inflation has been at or above 4.0% in consecutive months. The increase was driven by similar factors to previous months with automotive fuel, fruit and vegetables, rental accommodation and financial services prices moving higher during the period, partially offset by falls in furniture, telecommunications, audio visual and computing equipment prices.
Overall, prices rose in 28 expenditure categories, were unchanged in 47 and fell in 15 and while price pressures stabilised in the March quarter there is likely to be some upward pressure continuing into the June quarter CPI figures given the way data are collected, meaning inflationary pressures should continue for at least another three months.
According to TD Securities senior strategist Joshua Williamson the latest figures will keep the Reserve Bank of Australia (RBA) concerned about the inflation outlook as it remains well above the RBA’s target band and shows few signs of topping out.
One positive is the RBA had anticipated this and factored it into its decision to lift rates in February and March, meaning policy is now restrictive and, as Williamson notes, the economy has not yet had time to react to the two most recent rate increases as well as the unofficial increases from major banks in Australia lifting their interest rates even further.
As a result Williamson expects the RBA to adopt a “wait and see” approach in the shorter-term, which means there is unlikely to be a further increase in official interest rates at the RBA’s April meeting. Co-creator of the Inflation Gauge, Professor Don Harding, agrees an April rate hike is unlikely though he does expect rates will move higher.
Harding points out the real interest rate is now at 3.05% (official cash rate of 7.25% minus inflation at 4.2%) and while this is restrictive a move to 3.5% real rates for a sustained period is likely to be needed to bring inflation under control, though the timing of such an increase is currently uncertain.