Inflation could fall below 2% in 2012

Recent inflation data point to a sudden and significant deceleration in inflation. Without going over the importance of the stunning low September quarter CPI (a 14 year low of 0.3% for underlying inflation was recorded), the recent TD-MI MOnthly Inflation Gauge is pointing to another very low CPI result for the December quarter.

As one of the co-creators of the TD-MI Gauge, I am alert to its statistical strengths and weakness and can forage through unreported aspects of the report. In the most recent result, for October, the annualised rise for the last 3 months is just 0.1%! And depending on what happens to petrol prices in the next two months, there is a good change that the headline CPI result for the December quarter (published in late January) will be zero. With that sort of result, on top of the September quarter disinflation, the odds will favour annual inflation slipping below the bottom of the RBA's target - below 2% - some time in 2012.

If this occurs at a time when jobs growth remains sluggish, world activity soft and if asset price deflation persists, it is easy to see why the RBA will forced to keep cutting interest rates.

I would also point you to the TD-MI Gauge's "net balance" for price changes. It has been averaging about zero since March indicating that there are certainly no broad price or inflation pressures in the economy.

Inflation, for now, looks to be decelerating at a rapid pace. The RBA needs to be careful to ensure that it doesn't decelerate too much into 2012 by cutting rates a few more times over the next 6 to 12 months.