Inflation within targets at two-year high

by AB24 Apr 2014
Inflation is at a two-year high but has remained within the Reserve Bank of Australia’s target range and is unlikely to trigger interest rate hikes.

Australian Burueu of Statistics released its March quarter inflation statistics yesterday, which show headline inflation rate at 2.9% - just within the RBA’s target range of 2 to 3%.

Lower than expected inflation in the March quarter mean that interest rates are set to remain at current  record-low  levels, says the Housing Industry Association.

RBA had forecast that inflation would reach 3.25% by June, but compared to its preferred measures of underlying inflationary pressures this is well within target – the trimmed mean is at 2.6% and the weighted median at 2.7%.

“These figures auger well for continued recovery in Australia’s residential building industry. There were fears that inflation would break the 3% threshold during March, but today’s figures will have soothed these worries somewhat,” HIA senior economist Shane Garrett said.

“The latest inflation data will support the RBA’s position of maintaining interest rates at record low levels. Excess capacity in the economy has taken some of the heat out of price pressures resulting from the weaker dollar. Continued weakness in the labour market as well as the resurgence of the dollar over recent months means that inflation could even start to dip over the coming quarters,” he said.

According to the ABS, consumer price index (CPI) rose 0.6% in the March quarter, compared with a rise of 0.8% in the December quarter 2013. 

The housing component of CPI has increased by 3.6% over the 12 months to March, its lowest annual reading since June 2012. New dwelling purchases by owner occupiers rose by 2.4% over the year.

The benign inflation allays fears of an interest rate hike and could keep fuelling the property market's price and volume records.

However, Digital Finance Analytics principal Martin North believes an interest rate rise is still on the cards later in the year in an attempt to control inflation and house prices.

“The longer term prognosis for inflation will be determined by the exchange rate. If it drops back, inflation will likely move above 3%. The RBA may well have a tough job balancing interest rates and exchange rates at these inflation levels.”

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