Australian inflationary pressures remain close to non-existent

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Australian inflationary pressures ticked slightly higher in December with the latest TD-MI inflation gauge rising 0.2%.

The increase, following a 0.1% gain in November, saw the annual inflation rate tick up to 2.0% from 1.8% seen previously.

Despite the small acceleration, as the charts from TD reveal below, inflationary pressures remain close to non-existent despite the slumping Australian dollar.

According to TD, price increases for fruit and vegetables (+0.8%), holiday travel and accommodation (+2.3%, seasonal), and meat and seafood (+0.8%) were partially offset by price declines for fuel (-3.1%), non-alcoholic beverages (-2.7%) and rents (-0.9%).

Annette Beacher, TD Chief Asia-Pac macro strategist, suggests the report is consistent with the ABS core inflation reading coming in 0.5% for the December quarter, leaving the annual increase at the bottom end of the RBA’s 2-3% target band at 2.0%.

“With this December report we have finalised our December quarter CPI forecasts”, wrote Beacher following the release.

“We expect headline inflation to increase by 0.3% in the quarter, to be 1.7% higher than a year ago, while we forecast underlying inflation to increase by 0.5% in the quarter, for an annual rate of 2.0%.”

“These forecasts are entirely consistent with the RBA’s November projections,” she added.

Despite subdued inflationary pressures, Beacher expects the RBA will hold interest rates steady at 2% over the course of 2016, although admitted that “the rocky start to the year has increased the odds that a rate cut could be delivered should that prove to be beneficial.”

The ABS will release its December quarter CPI report on January 27 at 11.30am AEDT.

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