Australia | Jul 31 2009
By Chris Shaw
Signs of strength in the Australian economy continue to be evident, the latest being the TD Securities – Melbourne Institute Monthly Inflation Gauge, which rose by 0.9% in July to post the largest monthly increase in the gauge’s seven year history.
The increase compares to rises of 0.4% in June and a fall of 0.3% in May, meaning for the 12 months to the end of July the Inflation Gauge recorded an increase of 1.9%. This puts it just below the Reserve Bank of Australia’s (RBA) target band for inflation of 2.0-3.0%.
The July gain was driven by higher prices for communications, which alone contributed 0.27 percentage points to the overall increase, utilities and other housing, while prices for fruit and vegetables, financial services and audio-visual and computing equipment fell in the month.
TD Securities senior strategist Annete Beacher suggests the gauge data hint there has been a bottoming in inflation momentum, though the strength this month was partly through some one-off increases that may unwind in coming months. This means it remains uncertain as to whether or not there are increased inflationary pressures emerging for the Australian economy, particularly as the gauge remains below the RBA’s target band.
In Beacher’s view, today’s outcome means the RBA will almost certainly leave interest rates unchanged when it meets next week, with the cash rate likely to stay at the current 3.0% level for some time as the central bank assesses more data and looks through recent volatility.
While the RBA is likely moving towards a more neutral tone with respect to the rate outlook, Beacher suggests the potential for further rate cuts should be retained in the event the current economic recovery doesn’t prove to be self-sustaining, especially once the recent fiscal stimulus measures have flowed through the system.
Melbourne Institute professor Don Harding, co-creator of the gauge, notes inflation numbers have been very volatile since late last year and so he sees it taking a couple of months to determine whether today’s data are a sign inflation pressures are again picking up or whether the data are just another example of increased volatility.
In terms of the price pressures Harding points out prices rose in 32 expenditure groups and fell in only 12, meaning a net balance of 20 expenditure groups recording higher prices for the month. Given the latest figures Harding is now not so sure the beginning of an unwinding of the sustained increase in inflationary pressures in the Australian economy of the last several years is at hand.