Australia | Aug 01 2008
By Rudi Filapek-Vandyck
Has inflation peaked in Australia? Economists behind the TD Securities-Melbourne Institute monthly gauge of inflation in Australia seem divided. TD Securities believes signs are emerging inflation may be peaking and this will open the gate to the Reserve Bank of Australia cutting official interest rates soon. But professor Don Harding, co-creator of the joint inflation gauge, is not so sure.
TD Securities and the Melbourne Institute report their joint monthly inflation gauge rose by 0.4% in July, following a 0.5% rise in June. In the twelve months to July, their inflation gauge has now risen by 4.6%, following a 4.8% rise for the twelve months to June. They note year-end inflation has now been at or above 4.0% for six months and above 3% since September 2007.
Contributing most to the overall increase in July were price rises for utilities, automotive fuel, and holiday travel and accommodation. The rises were partially offset by falls in the prices of property rates and charges, fruit and vegetables, and snacks and confectionary. The price of automotive fuel for the twelve months to July rose by approximately 30%, while the price of rental accommodation rose by over 15% during the same period. In total, estimate the economists, automotive fuel and rental accommodation contributed approximately 2.0 percentage points to the yearly 4.6% increase.
Joshua Williamson, Senior Strategist at TD Securities, points out that a price increase in utilities accounted for almost half of the total monthly increase. He also believes some comfort can be taken from recent falls in commodity prices. If these falls prove sustained this will see petrol’s contribution to inflation fall next month, he says.
It could mean that yearly inflation has already peaked in Australia.
Professor Don Harding, co-creator of the joint inflation gauge, however, predicts September quarter inflation will still be “uncomfortably high” as price pressure returned with a vengeance in July with prices rising in 40 expenditure groups, falling in 14 for a net balance of 26 rises. “It is hard to escape the conclusion that the broadly based price pressure in July is attributable to the increased aggregate demand from the tax cuts that came into effect on 1 July”, argues Harding.
Revealing a difference in opinion with economists at TD Waterhouse who believe the next step in official interest rates will be down, professor Harding states: “The breadth of the price increases in July together with the fact that non-tradeables such as rental accommodation are experiencing double digit annual rates of inflation suggests that there is a substantial demand component to inflation. I remain of the view that this demand component is unlikely to be removed without further tightening of monetary policy.”