Finance Finance News Prices growing too slowly for RBA’s liking

Prices growing too slowly for RBA’s liking

Rates have stayed on hold. Photo: AAP
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Prices of Australians’ favourite goods and services grew slower than expected in the first three months of 2018 as slow wage growth bites, suggesting any interest rate rise is a long way off.

Inflation, the official measure of price changes, rose by an extra 0.4 per cent between January and March, the Australian Bureau of Statistics reported on Monday. Economists had expected 0.5 per cent.

The result was weaker than the October-December figure of 0.6 per cent, which was boosted by the usual Christmas splurge.

Over the last 12 months prices went up 1.9 per cent, which is below the Reserve Bank’s annual target of between 2 and 3 per cent. The RBA Governor has said inflation at about 2.5 per cent would be healthy.

The RBA has not moved the official cash rate, which impacts the cost of borrowing mortgages and other consumer financial products, since mid-2016. The official rate currently sits at an all-time low of 1.5 per cent.

Between January and March there was a spike in education, healthcare  and transport costs, as well an increase in vegetable prices due to shortages. But this was not enough to push the inflation rate over into the RBA’s target range.

JP Morgan economist Ben Jarman said the increases in education and healthcare were more modest than normal with low wages growth forcing households to cut back on costs. He doubted there were any signs of a pick-up in inflation in the immediate future.

“We have expected the accumulated rise in unit labour costs after last year’s surge in employment to offer a little support for core inflation in the near term, particularly in services,” Mr Jarman said in a statement.

“But this is unlikely to persist as employment growth moderates.”

The statistics bureau measures inflation using a made-up basket of goods and serves they think the average consumer would buy in the eight capital cities.

Underlying inflation – which strips out volatile price movements – was up 0.5 per cent in the quarter, and the annual rate was up 1.95 per cent.

Education prices rose 2.6 per cent for the quarter, thanks to a boost across preschool, primary and secondary education following the start of the new school year.

Pharmaceutical products and medical and hospital services supported a 2.2 per cent rise in healthcare, while fuel and motor vehicles triggered a 1.1 per cent lift in transport.

The largest fall in prices was in the clothing and footwear sector due to ongoing competition and discounting activity in the retail industry.

Recreation and culture, furnishings and communication all recorded a decline in prices.

The Australian dollar rose after the release of the data and continued to edge higher during the afternoon to 76.11 by 1347 AEST.

-with AAP

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