Yesterday’s quarterly inflation release, which showed prices falling by 0.3% over the December quarter across Australia, cemented expectations of a 1% cut in interest rates in February. How things have changed! My very first Stubborn Mule post back in May 2008 examined the inflationary pressures that had so concerned the Reserve Bank and led them to keep interest rates high well into the financial crisis. In that post I used a heatmap to dig down into the drivers of inflation, and a quick comparison of the latest December inflation rate with inflation six months earlier gives a very clear illustration of where prices are falling.
Austalian Quarterly Inflation – Dec 2008
(click to enlarge)
The big blue square standing out in the December chart is “Private Motoring”, which makes up almost 20% of the Consumer Price Index (CPI). Of course, the dominant factor here was the fall in petrol prices. The average price for a litre of petrol in Sydney in September was $1.52, but by December the price had fallen to $1.05.
The chart for the June quarter is clearly redder and overall prices rose 1.5%. The only striking price falls were in fruit and vegetables, which fell by 6.9%. However, even this move was largely a reversal of the 6.2% rise seen in March.
For some months now, the Reserve Bank has signalled that the focus of their concern has shifted from inflation to the weakness of the Australian economy, so markets were right to conclude that the December price fall reinforces the case for a large rate cut ahead. However, a look at oil prices suggests that petrol prices are on the rise again. An update of my Sydney petrol price model, suggests that wholesale oil prices will be pushing petrol prices back closer to $1.20/L. If these prices are sustained, we can expect to see Private Motoring bringing some inflationary pressure back into the June 2009 numbers.
Nevertheless, given the state of the world economy and the US economy in particular (which Citigroup’s chairman has described as being in a “death spiral”), it will take a bit more than climbing petrol prices to lead the Reserve Bank to tightening monetary policy again.
* Source: Australian Automobile Association.