Australia | Dec 01 2008
By Chris Shaw
The pace of inflationary pressures in the Australian economy continues to ease as evidenced by the TD Securities/Melbourne Institute Monthly Inflation Gauge. In November the index fell by 0.6% following on from the 0.2% decline recorded in October.
The fall marks the largest monthly fall in prices since the Gauge began in 2002, while the annual increase of 3.0% for the year to November is the lowest rate of increase since September 2007. TD Securities senior strategist Joshua Williamson notes the index has now fallen 1.8% since June of this year.
The November falls were on the back of declines in prices for automotive fuel, wine and domestic holiday accommodation and travel, which were greater than the price increases for fruit and vegetables, health services and rental accommodation.
According to Williamson, further falls in prices are expected given the Australian recession is only in its early stages, and the global economy is also weak. Such an environment is suggestive of commodity prices either staying low or falling further and this should also ease Australian inflationary pressures.
TD Securities global strategist Stephen Koukoulas points out the news on inflation is extreme at present, as the turnaround from a few months ago has been substantial and this is forcing a reassessment of the outlook for interest rates in Australia. He is now targeting an official cash rate of 2.5% by the middle of 2009, with a 1.0% cut at the next Reserve Bank of Australia (RBA) meeting tomorrow to be the next step in achieving this target, according to his forecasts.
Co-creator of the gauge, Professor Don Harding of the Melbourne Institute, notes the turnaround in prices in recent months, as evidenced by the fall in the inflation gauge, means inflation as measured by Consumer Price Index figures is likely to have fallen by 0.45% in the September quarter.
As Harding points out, prices fell in 19 expenditure groups while rising in 29 groups, but the extent of the fall in fuel prices as well as easing domestic demand means price pressures will fall further. This makes deflation a likely outcome in the March quarter of 2009 in his view, while annual inflation should fall below 2.0% by the same quarter.
Harding suggests this means with official cash rates currently at 5.25% there are further significant cuts in interest rates to come if real interest rates are not to tighten. The current economic downturn means policymakers are likely to adopt a stimulatory level of policy rather than a contractionary one.