Australia | Feb 01 2010
By Chris Shaw
Inflation momentum in Australia appears to be picking up as evidenced by the 0.8% gain in the TD Securities – Melbourne Institute Inflation Gauge recorded in January, up from the 0.3% gains recorded in both November and December last year. The January result means the Inflation Gauge rose 2.6% over the past 12 months, putting it in the middle of the Reserve Bank of Australia’s target band of 2-3%.
Seasonal price changes contributed the most to the gains in the Gauge for January as prices rose for holiday, travel and accommodation, utilities and education. Prices for fruit and vegetables, furniture and furnishings, books, newspapers and magazines fell in the month but not by enough to prevent the Gauge gaining overall.
TD Securities senior strategist Annette Beacher notes the result means headline inflation has now increased substantially for three consecutive months as the group’s trimmed measure rose 0.5% in January, its highest rate of gain for six months. When added to last week’s news inflation was stickier than the Reserve Bank of Australia (RBA) had expected given an annual rate of 3.4% against its forecast of 3.25%, this all but assures a further 25 basis point rate increase tomorrow in her view.
Beacher suggests the RBA is also likely to lift rates as recent confirmation of falling unemployment gives the central bank an opportunity to become more hawkish in its commentary with respect to shrinking spare capacity, which would help to dampen inflationary expectations in the economy overall.
Melbourne Institute professor and co-creator of the Gauge, Don Harding, notes price pressures remain relatively subdued as prices gained in 23 expenditure groups in the month and fell in 22. According to Harding, the boost in the headline number was driven by higher utilities and education prices, the surprise with the former being the magnitude of the increase. For the latter the increase can only be explained by some combination of stronger domestic demand and expected wage changes in his view.
In more general terms, Harding sees this as meaning it is the non-tradeables sector exhibiting the large price rises thanks to overly strong domestic demand, as the stronger Australian dollar is generating price declines in the tradeables sector of the economy.