Australia Consumer Prices Fall Most in Decade

Australian consumer prices fell by the most in a decade last quarter as a huge drop in petrol helped pull annual inflation down sharply, justifying talk of another aggressive cut in interest rates next week.

CNBC.com

Measures of core inflation showed some stickiness with the cost of food, tobacco, housing, rents and clothing all still rising, suggesting deflation was a distant danger in Australia.

Yet such was the dire outlook for global growth that analysts were convinced that inflation would slow further, allowing the Reserve Bank of Australia (RBA) to ease as it desired.

"It tells us that the inflation pulse in the economy is definitely coming off," said Warren Hogan, head of Australian economics at ANZ. "If the RBA was tending to want to do another aggressive cut, then this certainly doesn't stand in the way."

The central bank holds its monthly policy meeting on Feb. 3 and investors are counting on a cut of at least 75 basis points in the 4.25 percent cash rate.

Wednesday's report from the government showed its consumer price index (CPI) fell 0.3 percent in the fourth quarter of last year, the biggest drop since late 1997 and down from a 1.2 percent increase the previous quarter.

The decline was driven by a steep 18 percent drop in petrol costs, while the cost of cars, drugs and finance also eased. That was balanced somewhat by an 8 percent jump in fruit prices, along with gains in rents, fast food and tobacco.

The CPI was up 3.7 percent on the same quarter a year earlier, a marked slowdown from a 5.0 percent pace in the third quarter and well below the RBA's own forecast of 4.25 percent.

Analysts also suspect consumer prices could be flat or even fall again this quarter, dragging the annual pace back into the central bank's 2 to 3 percent target band.
     
Back In Range

"Importantly, the odds are that the annual rate of headline inflation is going to drop quite markedly in coming quarters and be back in target range," said Su-Lin Ong, a senior economist at RBC Capital Markets.

"It confirms a moderation in price pressures and there is a pretty good chance of a 100 basis point rate-cut next week."

Measures of core inflation favored by the RBA rose by an average 0.75 percent in the fourth quarter, pulling the annual pace down to 4.35 percent, from 4.7 percent. These strip out the biggest price moves in any quarter to show the underlying trend.

The central bank has already anticipated a substantial slowdown in inflation by slashing rates by 3 percentage points since September in a desperate effort to cushion the country from a world recession.

"The deepest global recession in 70 years will knee-cap the Australian economy, slash national income and see the RBA deliver what should be amazingly stimulatory monetary policy," said Joshua Williamson, a senior strategist at TD Securities.

He expects the cash rate to sink to 2.0 percent or lower by mid-2009 as the global recession, commodity price falls and weak domestic demand drive inflation below the RBA's target range.

The risk of recession was underlined by a leading index of economic activity released on Wednesday.

The annualized growth rate of the Westpac Institutional Bank-Melbourne Institute leading index of economic activity sank to -2.2 percent in November, from -0.3 percent in October.

"This sharp fall coupled with the further deterioration in the global growth environment intensifies the risks that the Australian economy will contract through 2009," said Westpac's chief economist, Bill Evans.

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