Inflation beats forecast for March quarter

Alex Druce
(Australian Associated Press)


Inflation has risen by a higher than expected 0.3 per cent in the March quarter, reflecting higher costs from supply restrictions during drought and bushfires and the early effects of COVID-19.

Economists had tipped a 0.2 per cent quarterly increase after a 0.7 per cent rise in the three months to December 31.

The consumer price index rose to a better-than-expected 2.2 per cent per cent in the 12 months to March 31, figures from the Australian Bureau of Statistics on Wednesday showed, beating expectations of a rise to 1.9 per cent from 1.8 per cent in December.

It is the first time CPI has been within the Reserve Bank’s target range of 2.0 per cent to 3.0 per cent since the June quarter of 2018, and is at its highest since the September quarter of 2014.

This is likely to be short-lived, however, as economists maintain the coronavirus crisis is very likely to push the economy into deflation in the June quarter.

A collapse in oil prices, combined with the introduction of free childcare and the deferral or reduction in some price increases, means year-ended headline inflation to June will likely turn negative for the first time since the 1960s.

RBA governor Philip Lowe indicated as much in the central bank’s economic update last week and BIS Oxford chief economist Dr Sarah Hunter agrees.

“Looking ahead, although prices may remain elevated for some groceries due to additional demand, the current crisis is very likely to push the economy into deflation in the June quarter,” Dr Hunter said in a note.

The most significant price rises in the March 2020 quarter were for food and non-alcoholic beverages, up 1.9 per cent, while alcohol and tobacco prices rose 1.6 per cent,.

Dr Hunter said the impact of the drought and bushfires was very clear, with fresh food prices up sharply.

Fruit and vegetables prices rose 6.0 per cent and meat and seafood by 2.0 per cent as drought restricted supply and the bushfires temporarily increased transport costs.

Education rose 2.6 per cent and health rose 1.7 per cent.

The most significant price falls for the quarter were for automotive fuel, down 6.0 per cent, domestic holiday travel and accommodation, down 3.1 per cent, and international holiday travel and accommodation, down 3.0 per cent.

The Australian dollar jumped to 65.25 US cents from 65.17 US cents in the minutes after the data’s release. APAC economist Callam Pickering said shifts in consumer behaviour due to coronavirus restrictions, as well as loss of income and wealth and falling global commodity prices, will all impact consumer prices in 2020.

“Childcare is now effectively free and rents will surely decline, both of which will put downward pressure on inflation,” Mr Pickering said.

He said some patterns will be temporary, shifting back towards normal once economic restrictions are lifted, but others will be more persistent.

“The loss of wages and elevated rate of unemployment may lead to persistently low inflation, even for core inflationary measures,” he said.

“Wage growth is a strong determinant of household demand and that drives consumer prices … double digit unemployment and historically low wage growth is a recipe for deflation.”


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