Inflation has fallen to its lowest level in two and a half years, reflecting a decrease in consumer spending and a massive drop in the price of petrol.
The consumer price index (CPI), which measures the cost of consumer goods, grew by 1.7 per cent in 2014. This is well below the Reserve Bank of Australia’s target of between 2 and 3 per cent. When inflation falls below this target, the RBA’s response is often to lower the cash rate.
However, the RBA excludes ‘volatile items’ from its assessment of CPI, and adjusting for that inflation actually rose by 2.1 per cent, just over the target threshold. That makes a cash rate cut less likely.
According to the Australian Bureau of Statistics, CPI rose just 0.2% in the December quarter 2014, following a rise of 0.5% in the September quarter 2014.
The most significant price rises were for domestic holiday travel and accommodation (+5.8%), tobacco (+4.8%) and new dwelling purchase by owner-occupiers (+1.1%).
The ABS said these rises were partially offset by a fall in automotive fuel (–6.8%). Petrol prices also fell, with average unleaded petrol reaching a low of $1.17 per litre in December 2014, the lowest recorded average daily price since February 2009.
The CPI rose 1.7% through the year to the December quarter 2014, following a rise of 2.3% through the year to the September quarter 2014.
The Reserve Bank will make a decision on the cash rate next Tuesday. Commentators are currently split on whether RBA boss Glenn Stevens will lower the rate by 0.25 per cent, or keep it at 2.5 per cent, where it has been for close to two years.