No Easing In Australia’s Inflationary Pressures

Array
(
    [0] => Array
        (
        )

    [1] => Array
        (
        )

)

By Chris Shaw

Inflation shows few if any signs of slowing and so remains the most pressing issue facing Australian policy makers according to TD Securities senior strategist Joshua Williamson, who made the comments following the release of the latest TD Securities – Melbourne Institute Monthly Inflation Gauge.

The Gauge rose 0.3% in May after rising 0.5% in April, putting inflation at above 4.0% in annual terms. The 4.5% increase in the Gauge in the 12 months to May is the fastest rate of annual increase in its history of more than five and a half years.

Major contributors to the gain for the month were price increases for rental accommodation, fuel and financial services, while the prices of fruit and holiday travel and accommodation fell slightly.

For the Reserve Bank of Australia (RBA) Williamson sees the latest data as disappointing, as the bank chose not to lift rates in either April or May but is still seeing no sign of inflation easing from its high levels.

While not expecting a rate hike at tomorrow’s meeting Williamson expects the data will mean the RBA remains on watch for signs its recent increases in rates are slowing economic activity by enough to return inflation to its target range, or whether sustained higher inflation expectations are flowing through to actual inflation outcomes.

Co-founder of the Gauge Professor Don Harding suggests the latest data show a slight easing in price pressures as while prices rose in 27 expenditure groups they fell in 12 groups. While the headline number is consistent with the RBA’s forecast in its May 9th policy statement Harding takes the view the latest increase in inflation has essentially undone the most recent increase in interest rates as it means the real cash rate is now at around 2.9%.

On his numbers Harding suggests the RBA needs to keep the real cash rate at around 3.5% (cash rate above inflation) for a sustained period if inflation is to be brought under control, which suggests the risk to interest rates remains to the upside in coming months.

Click to view our Glossary of Financial Terms