Monday, 16 April 2012

Inflation Poised to Fall to a 12 year Low

The March quarter consumer price index will be released on 24 April.  There is a good chance that the annual underlying inflation rate will fall to a 12 year low.

According to the data from the monthly TD-MI Monthly Inflation Gauge, it is pretty clear that underlying inflation for the March quarter will be contained.  My guess, based on those data, is for the underlying CPI to rise 0.6% for the quarter.  A few market forecasts that I have seen are for a rise of 0.5 or 0.6%, so I suspect everyone else is looking at the Inflation Gauge result in coming up with these forecasts.

If the underlying inflation rate comes in at 0.5% and of course there are no revisions to the recent data, the annual rise will drop to 2.3% - the lowest annual result since the December quarter 2000.   And this 2.3% includes (obviously) a 0.8% quarterly rise from the June quarter 2011, with that result dropping out of the annual run rate next time meaning there is a strong chance that annual inflation will fall yet further by the June quarter.

Looked at another way, the annualized rate for underlying inflation for the last 3 quarters will be around 2.0% - clearly very low and no surprise given the prolonged period of sub-trend economic growth and well contained wages pressures.

A year ago, in the May 2011 Statement on Monetary Policy, the RBA was forecasting underlying inflation to be 3% in the year to June 2012.  As is clear now, this is wrong.

With inflation missing the RBA's own forecasts by 75 basis points and possibly more, the RBA has been slow to cut interest rates.  There have been only 50 basis points of easing in the official rate in that time with mortgage rates down less than 40 basis points.  The scope, very clearly, is for more cuts to be delivered, if for no other reason that keeping real rates steady. 

But frankly with the economy in muddle mode, monetary policy needs to become accommodative to ensure inflation does not become too low.

No comments:

Post a Comment