Finance Finance News Inflation back on the slide, so rate rises are off the agenda

Inflation back on the slide, so rate rises are off the agenda

Inflation low.
Consumer caution is keeping inflation low. Photo: Getty
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If you were worrying about recent talk of interest rate rises leading to a hike in your mortgage or car loan, forget about it. Australia’s inflation is on the slide again with the prices growing in the June quarter by a miserly 0.2 per cent, the lowest June outcome since 2003.

That compares to 0.5 per cent in the March quarter and puts the annual inflation rate at 1.9 per cent. The Reserve Bank of Australia aims to keep inflation between 2 and 3 per cent.

Below that band it is more likely to cut rates and above it a rate rise can be on the cards and inflation hasn’t been at 3 per cent since 2011.

Low inflation typically means low demand and competition is stopping business putting up prices. A look behind the headline figures shows something interesting. The only areas in which prices are growing are driven either by skyrocketing house prices (mortgages and rents) or government mandates.

Alcohol and tobacco costs rose 5.9 per cent for the year due to tax rises and medical and hospital costs rose 4.1 per cent for the quarter driven by private health insurance hikes. Yearly housing costs were up 2.4 per cent and food rose 1.9 per cent due mainly to the effects of Cyclone Debbie in Queensland.

Consumer discretionary products, however, are weak. Domestic holiday travel and accommodation fell 3.2 per cent and petrol fell 2.5 per cent. In fact, women’s clothing and electrical appliance price growth is the lowest in 30 years.

Alex Joiner, chief economist for IFM Investors, said clothing prices are driven by increases in competition with the coming of foreign retailers.

“There has actually been significant increases in import prices since 2013 but competition is holding down prices.”

The fall in electrical goods prices is a result of products becoming dramatically cheaper. But if you think it doesn’t feel like that you are probably right.

“What we see is ‘quality adjustment’ as people buy a better product for the same money. A big flat screen TV might cost $4000 but you get a 65 inch screen for that, not a 42 inch you could have bought a few years ago,” Dr Joiner said.

Low inflation has RBA governor Phil Lowe between a rock and a hard place. Speaking in Sydney on Wednesday he said record-low wage growth (1.9 per cent) is eating away at confidence, making punters reluctant to spend.

Normally that would mean further rate cuts but he doesn’t want to throw kerosene on the housing price fire.

“Faced with low inflation, low unemployment and low interest rates, investors are likely to find it attractive to borrow money to buy assets,” Dr Lowe warned.

“Over recent times you would have noticed that we have been paying close attention to the risks in household balance sheets. Household debt is high and rising faster than the unusually slow growth in incomes.”

Dr Lowe also pointed out a till-now unobserved phenomenon apparent in the labour market. People are less likely to change jobs than even amid the insecurity of the 1991 recession.

“The share of employed people changing employers is around the lowest in recent decades. It is likely that in an environment of less job security, fewer people are inclined to switch employers. There is also a demand-side effect, with fewer firms attempting to attract workers from other firms.”

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