train wreck in slow motion - where's the rba, page-10

STEPHEN JOHNSON
January 19, 2009 12:10pm
A KEY inflation measure has fallen to the lowest level in more than three years, possibly paving the way for 1960s interest rates by next month.

The TD Securities-Melbourne Institute inflation gauge has fallen for three months in a row for the first time since the series began, sparking concerns that deflation could be a big issue this year.

TD Securities' Joshua Williamson said a fall in inflation could push Reserve Bank to cut interest rates by 75 basis points next month.

This would take the cash rate to 3.5 per cent, a level last seen in early 1965.

The inflation measure fell by 0.2 per cent in December, following a 0.6 per cent fall in November, driven by falls in petrol and vegetable prices.

Over the year, the inflation gauge measure grew by 2.2 per cent, the lowest rate of increase since May 2005, and substantially below the peak of 4.8 per cent in June 2008.

Mr Williamson said deflation would be a bigger issue than inflation in the first half of this year.

"The TD-Melbourne Institute inflation gauge confirms the transition from a high inflation environment, which was evident in the period up to mid-2008, to a position now where inflation is well contained and squarely within the range of the RBA," he said.

"The momentum of prices suggests that deflation risks rather than concern about inflation could be more pronounced in the first half of 2009."

The annual inflation gauge has fallen below the mid-point of the RBA's 2 to 3 per cent target for the first time since May 2005.

Falling petrol, fruit and vegetable prices pulled down the inflation gauge measure for December, offset by rising rents and holiday accommodation prices.

La Trobe University economics and finance professor Don Harding said consumer price index inflation was likely to decline in the December quarter, but he said the Federal Government's $10.4 billion fiscal stimulus could revive broader price pressures.

"If these broader measures of price pressure do not moderate then the decline in headline inflation will be shortlived, presenting the RBA and the government with a diabolical policy challenge in 2009," he said.

CPI data for the December quarter is due out next week, with the RBA's next board meeting to be held on February 3.

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