Benign inflation to spark more rate cuts

19 Oct 2012, 1:17 pm   -   Source: AAP

Australia's inflation is expected to remain subdued in the September quarter and it would mean there will be more interest rate cuts on the way.

Australia's inflation is expected to have stayed soft in the September quarter and could prompt an interest rate cut on Melbourne Cup day.

CommSec chief economist Craig James says discounting by retailers is a factor in keeping a lid on consumer prices.

"Overall, the underlying rate remains under control because consumers remain cautious because they shop around and that's putting downward pressure on prices and margins," he said.

"It was something Woolworths was highlighting in terms of its quarterly result (released on Thursday)."

The consumer price index (CPI) is expected to rise by 1.1 per cent in the three months to September, for an annual rate of 1.6 per cent, according to an AAP survey of 15 economists.

For underlying inflation, which excludes volatile price movements, the median forecast was 0.6 per cent for the quarter and 2.2 per cent over the year.

The CPI will be released on Wednesday by the Australian Bureau of Statistics (ABS).

The headline inflation rate is below the Reserve Bank of Australia's (RBA) two to three per cent target range and this could spark another interest rate cut.

The last time the RBA reduced the rate was at the October 2 board meeting, by a quarter of a percentage point to 3.25 per cent, after cutting in May and June.

"You've still got a relative lack of responsiveness to the rate cuts that we've had," Mr James said. "We've cut rates significantly in Australia but we haven't seen a huge pick up.

"The Reserve Bank believes that this cautious response is likely to continue and it will be more confident about pushing rates down in November."

AMP chief economist Shane Oliver said the main driver for the rise in the inflation rate is electricity price increases after the introduction of the carbon tax on July 1.

"If you take out the carbon tax impact, which is about 0.3 to 0.4 per cent, then the headline rate of inflation would be down to 0.7 or 0.8 per cent rather than around 1.1 per cent," Dr Oliver said.

"I guess the big surprise is there doesn't seem to be the flow through of the carbon tax to the other parts of the economy, it's been mainly confined to higher electricity prices at this stage."

Dr Oliver said the underlying picture for inflation is a reflection of struggling parts of the economy.

"A continued lack of pricing power is a reflection of the weak retail conditions," he said.

"It's still a pretty benign inflation outcome, consistent with more rate cuts.

"The Reserve Bank has already moved once, quite often the Reserve will do rate cuts back to back.

"I think there is plenty of room for another one.

"Since the last interest rate cut we have seen bad news on unemployment, more soft readings for consumer and business confidence in Australia.

"Another benign inflation reading will be consistent with a Melbourne Cup rate cut.

Dr Oliver said he thinks the RBA will keep the cash rate at three per cent, then make further cuts in at the February and March board meetings.

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