Australia | Sep 01 2008
By Andrew Nelson
Let’s not factor in too many big rates cuts too soon, because inflation is still inflating. The TD Securities Monthly Inflation Gauge rose by 0.1% in August, and while not as high as the 0.4% rise in July, it shows inflation is still on the rise. In the twelve months to August, the Inflation Gauge rose by 4.2%, down from the 4.6% rise for the twelve months to July, but still solidly above the top of the RBA’s comfort range.
TD Securities Senior Strategist Joshua Williamson says the reading shows that inflation in Australia remains stubbornly high. He admits the monthly result was less than in previous months, but it was still a shock given the obvious fall in petrol prices. Williamson reasons that without the sharp fall in petrol prices, the Gauge would have risen a record equalling 0.6% for the month.
This indicates that inflation pressures are still elevated despite what is a clear slowing in the economy, says Williamson.
While he doesn’t go so far as to say tomorrows’ expected rate cut should be placed in doubt, he does say that further interest rate cuts are questionable given the persistence of price pressures. The current numbers, at best, could support only two or three 25 basis cuts over the next 12 to 18 months, especially as what is being seen in the Inflation Gauge is being reflected in the official Consumer Price Index, he reasons.
Inflation Gauge co-creator Professor Don Harding confirms that the Inflation Gauge, when read against the September quarter CPI numbers from the ABS, indicate an annual rate of inflation of 4.3%.
He takes an even dimmer view on the prospect of rate cuts, saying it is unlikely the RBA can head off inflation even with current monetary policy settings.
Professor Harding sees the prospect of capping inflation diminishing significantly if the RBA cuts the cash rate by 25 basis points tomorrow and sees it as very unlikely the central bank will embark on monetary policy of the magnitude hoped for by financial markets. This would serve to unleash demand and generate “inflation pressures not seen for a generation”, he concluded.