Australian inflation has been weak for years -- and economists reckon the start of 2018 was the same

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  • Australia’s underlying inflation has been below the RBA’s 2-3% target for over two years.
  • Economists expect that continued in the March quarter, forecasting an annual increase of 1.85%.
  • Westpac expects weak inflationary pressures will persist for some time yet.

Australian consumer price inflation (CPI) has been below the Reserve Bank of Australia’s (RBA) 2-3% annual target for more than two years, helping to explain why it isn’t lifting interest rates like policymakers at the Bank of Canada, Bank of England and US Federal Reserve.

Economists expect that trend continued in early 2018.

Of the 20 polled by Bloomberg, the median forecast for underlying CPI — of more importance when it comes to the outlook for interest rate settings — is for a quarterly increase of 0.5%, leaving the change on a year earlier at 1.85%.

In the December quarter, underlying CPI rose by 1.87% from a year earlier.

Underlying CPI, also known as core CPI, removes volatile price movements, providing a better indication on the overall trend in inflationary pressures. Most use the average of the Australian Bureau of Statistics’ (ABS) trimmed mean and weighted median inflation measures to calculate this reading.

Headline CPI, including volatile price movements over both the quarter and year, is also expected to increase by 0.5% over the quarter, seeing the annual rate lift to 2% from 1.9%.

Justin Smirk, Senior Economist at Westpac, is one forecaster with a better track record than most when it comes to predicting how the inflation report might print, especially in recent times.

After crunching the price movements seen last quarter, he’s looking for both underlying and headline inflation to increase by 0.5%, leaving the annual rate for both at 1.9%.

“Core inflation is forecast to print 0.5% for the quarter holding the annual pace flat at 1.9% year-on-year,” he said.

“The trimmed mean is forecast to rise 0.54% while the weighted median forecast is 0.47%. The two-quarter annualised pace is forecast to lift modestly to 1.8% year-on-year from 1.6% year-on-year — still under the bottom of the RBA’s target band.”

And Smirk expects the weak inflationary trend to remain in place for sometime yet.

“With the expected moderation in dwelling purchases price inflation through 2018, along with consumer goods still captive to a competitive deflationary cycle, it is hard to see core inflation breaking much higher,” he said.

Based off the RBA’s economic forecasts offered in February, it expects underlying inflation to slowly creep back to 2% over the next couple of years, only reentering the bottom of its 2-3% target by mid-2020.

Given that outlook, RBA Governor Philip Lowe said earlier this month that he does not see a strong case for a near-term adjustment in the cash rate.

“A continuation of the current stance of monetary policy in Australia will help our economy adjust and should see further progress in reducing unemployment and having inflation return to target,” he said.

Lowe, along with the RBA board, expects the next move in official interest rates will be higher, not lower.

Financial markets agree with this assessment, pricing in a full 25 basis point increase in the cash rate by the middle of next year.

Australia’s March quarter inflation report will be released next Tuesday, April 24.

NOW READ: Macquarie says inflationary pressures in Australia remain close to non-existent — but that won’t be enough for the RBA to cut rates

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