Australia | Nov 03 2008
By Chris Shaw
The Australian economy is increasingly coming under pressure but there is a silver lining to the cloud in that inflationary pressures that have been evident for some time are now unwinding, and relatively quickly. This is the finding of TD Securities senior strategist Joshua Williamson, who made the point following the release of the TD Securities – Melbourne Institute Monthly Inflation Gauge for October.
For the month the index fell 0.2%, its first fall since February of 2006, while in annual terms for the year to October it was up 3.9%, which compares to the 4.5% annual increase for the year to September. Williamson notes this is the first time the gauge has been below 4.0% in annual terms since January this year.
The major contributors to the fall were lower prices for fruit and vegetables, holiday travel, accommodation and household services. These were offset to some extent by higher prices for books, newspapers, magazines and financial services.
In Williamson’s view the combination of a depressed domestic economy, weak consumer demand and sharp falls in commodity prices means Australia could now be in the early stages of a significant fall in price pressures, with current momentum suggesting inflation could fall back in the Reserve Bank of Australia’s (RBA) target rate of 2-3% by the middle of 2009.
According to Williamson this means the RBA is likely to have increased confidence that further cuts to official interest rates and additional monetary policy stimulus are appropriate policy in the current environment, which increases the likelihood of a further 0.50% cut when the RBA meets this week.
Longer-term Williamson sees scope for the official cash rate to hit 4.0% in Australia if inflation continues to fall and the economy continues to weaken.
Co creator of the gauge, Melbourne Institute Professor Don Harden, noted price pressures remain elevated as prices rose in 32 expenditure groups in the month and fell in just 14, though Harden agrees with Williamson in suggesting price pressures will ease in coming months as economic activity levels slow down.