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Inflation slides to lowest since 2005

January 19, 2009 - 10:51AM

A private gauge of Australian inflation fell for a third straight month in December, dragging annual inflation to its lowest since 2005 and suggesting there was scope for further cuts in interest rates.

The TD Securities-Melbourne Institute monthly inflation gauge fell 0.2% in December, on top of a 0.6% drop the month before and a 0.2% dip in October. This was the first time in the history of the series that the gauge had fallen for three consecutive months.

Annual inflation slowed to 2.2%, from 3.0% in November. That was the lowest since May 2005 and a long way from June's peak of 4.8%.

"The momentum of prices suggests that deflation risks rather than concern about inflation could be more pronounced in the first half of 2009," said Joshua Williamson, a senior economist at TD Securities.

"The results certainly validate the easing cycle from the Reserve Bank to date, and the mix of recessed economic conditions and sharply falling inflation suggests more interest rate reductions are inevitable," he argued.

The Reserve Bank of Australia (RBA) has already slashed its key cash rate by 3 percentage points to 4.25%, and analysts look for at least another 75 basis points of easing to 3.5% at its next policy meeting on Feb. 3.

The market is ultimately pricing in an easing to around 2.5%, which would be by far the lowest since the RBA adopted an official cash target in the early 1990s.

Don Harding from the Melbourne Institute said the inflation gauge suggested the official consumer price index (CPI) had fallen by around 0.64% over the fourth quarter.

That would bring the annual pace down sharply to around 3.3%, from 5.0% in the third quarter, which had been the highest since 2001.

However, measures of core inflation were not so promising. The gauge measuring prices excluding fuel, fruit and vegetables climbed 0.6% in December, lifting the annual pace of inflation to 3.6%, from 3.5% in November.

The trimmed mean, which excludes the biggest price changes in any month, also rose 0.2% in December, while the annual rate rose back to 3.6%, from 2.9% the month before.

Contributing most to the overall change in December were price falls for automotive fuel, and fruit and vegetables. The falls were partially offset by price rises in rents, household supplies, and holiday travel and accommodation.

The price of fuel fell by around 15% in December and was approximately 25% below its level a year ago.

In contrast, rents rose by almost 3% in December, to be around 14% higher for the year.