Australia’s Inflationary Pressures At Five Year High

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By Chris Shaw

There are no signs yet of any easing in Australia’s inflationary pressures in terms of headline numbers, at least not according to the TD Securities-Melbourne Institute Inflation Gauge as for the year to the end of June it recorded the largest annual increase in its five and a half year history.

For the month of June the Gauge rose 0.5%, which followed a 0.3% increase in May and represented a 12-month increase of 4.8%, driven by a 25% annual increase in fuel prices and a 14% annual hike in rental accomodation prices.

While this was partially offset by lower prices for goods such as fruit and vegetables the strength in fuel prices is distorting the gauge to some extent according to TD Securities senior strategst Joshua Williamson, as it is keeping the monthly readings at high levels.

Excluding fuel the annualised increase in inflation is 2.5% over the past three months but 2.9% for the last four months, so if oil prices decline in coming months as expected Williamson suggests there may be some early signs of a deceleration in the rate of inflation.

But even allowing for this he suggests inflation remains a concern given the economy’s capacity constraints and the boost to rents coming from the housing shortage, meaning the Reserve Bank of Australia (RBA) is likely to want to see further evidence inflation is in check before it considers moving to a more neutral level of monetary policy.

Co-creator of the gauge professor Don Harding of the Melbourne Institute also suggests inflationary pressures remain high as his forecast for the June quarter CPI is 1.28%, which translates into an annual rate of 4.3%. Harding also points out price pressures increased in June as there were price gains in 29 expenditure groups and falls in only 12.

As well Harding notes with rents continuing to grow strongly and given the breadth of inflationary pressure there appears to be a demand component to Australia’s inflation at present, with the only way to remove this being via tighter monetary policy.

With actual inflation likely to be above expectations in coming months as a result Harding expects the RBA will lift rates further later this year.

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