A small rise in inflation has sparked hopes that the Australian economy may be on the mend. But only briefly.
Figures from the Australian Bureau of Statistics showed the consumer price index (CPI) climbed to 0.6 per cent in the June quarter, pushing inflation up to 1.6 per cent for the year to June.
The results are an improvement on the dismal 0.0 per cent and 1.3 per cent for the March quarter respectively, and show inflation edging closer to the Reserve Bank’s (RBA) target of 2 to 3 per cent.
The 0.6 per cent figure in June was also slightly above the market’s expectations of 0.5 per cent – a forecast based largely on the the RBA’s two cuts to interest rates in June and July designed to stimulate the economy.
So, great news for an idling economy that needs to get revving again?
Not so hasty, is the consensus of pundits, who warn that any excitement about the sluggish economy finally gaining some steam is premature.
And, they say, the slightly better result won’t change the prospect of a further cut to interest rates in 2019.
The June figure, while slightly up, was still the 14th consecutive quarter that inflation has been below the RBA’s target of 2 to 3 per cent.
Dr Jim Stanford, an economist with the Centre for Future Work, said while the figure was stronger than expected, it was largely down to a spike in fuel prices.
“The 0.6 per cent is a bit of a bounce, but the year-on-year figure of 1.6 per cent is still well below the RBA target, and a big chunk of this quarter was petrol prices,” Dr Stanford said.
Dr Stanford said petrol prices were up 10.2 per cent over the quarter, so about half of the 0.6 per cent inflation figure would have been made up by petrol.
“So I’d say that is not a great news story,” he said.
The macro-economic data continues to show a generally weak outlook for Australia.’’
Indeed.com economist Callam Pickering agreed that while the June figure appeared positive, a closer examination suggested Australia’s inflation problem was still dire.
“Unfortunately, the stronger inflation read for the June quarter was largely due to volatile or one-off factors, such as the 10 per cent increase in automotive fuel, rather than a broad pick-up in inflationary pressures,” Mr Pickering said.
The RBA’s cuts to rates in June and July to 1.0 per cent should help boost inflation but the cuts were too late to deliver a meaningful rise during June.
The other big price rises came in medical and hospital services (up 2.6 per cent), overseas travel (2.7 per cent), tobacco (2.4 per cent) and furniture and furnishings (2.5 per cent).
The fact that clothing and footwear had risen only 0.2 per cent for the year to June reflects heavy discounting in response to weak consumer spending.
Rate cut still on the way … but what about wages?
RBA governor Philip Lowe said last week “it will be some time before inflation is comfortably back within the [RBA’s] target range”, meaning low interest rates would be around for a while yet.
BIS Oxford chief economist Sarah Hunter agreed, saying the June result was unlikely to change the prospects for another cut to the official cash rate by the RBA in 2019, Dr Hunter said.
“A further cut to 0.75 per cent is very likely in the December quarter and this could be followed by more easing in early 2020 if we don’t see signs of the residential [construction] downturn stabilising or the income tax cuts feeding through to consumer spending.”
The markets have already priced in a further 25 basis point rate cut by October.
Meanwhile, trade union boss Sally McManus said slow wage growth was the biggest hurdle to getting the economy moving again.
Ms McManus cited this week’s HILDA survey results, which showed that median household income had risen just 3.47 per cent between 2009 and 2017 – a fall in real terms.
“The economy has stalled because working people have nothing to spend,” Ms McManus said.
“The Morrison government has designed a system of economic policies which has given employers unprecedented power to suppress wages, and the resulting lack of wage growth has crashed the economy.
“The only thing keeping CPI from completely bottoming out is the constantly increasing costs of essential items. Even as the economy stalls, the cost of living is going up for working people.”