Thursday 29th October 2009

Swan insists inflation is “moderating”

by Alan Thornhill

The Federal Treasurer, Wayne Swan, insists that Australia’s inflation is still “moderating.”

That statement is important.  The next rise in interest rates might well be delayed, if the Reserve Bank agrees.

The Treasurer made his declaration  several times yesterday, after the Statistician reported  an unusually sharp rise  – of 1 per cent -  in the  nation’s headline inflation rate during the September quarter.

He told Federal parliament that the quarterly rise had been largely driven by “some unusually large increases” in prices charged by State utilities.

Mr Swan said those rises had produced almost half of the quarterly rise.

However the Treasurer  said he was “not blaming the States.”

The Consumer Price Index figures, that the Statistician released yesterday, will be watched closely, because the Reserve Bank will take them into account, when it reviews Australia’s interest rates next month.

The bureau reported that the nation’s “headline” rate of inflation fell from 1.5 per cent in the 12 months to the end of June, to just 1.3 per cent, in the year to the end of September.

However it is not the so-called headline rate of inflation that the Reserve Bank board studies, when it reviews rates. It looks, instead, at another figure called the underlying rate of  inflation.

The distinction is important, in the rate fixing system.

The bank aims to keep Australia’s inflation in a 2-3 per cent range, over the course of the business cycle.

So – at 1.3 per cent – the headline rate of  inflation is now well below the bank’s target rate.

But – at 3.5 per cent – the underlying rate of inflation is above it.

However, Mr Swan told reporters that even Australia’s underlying inflation rate  had “eased,”  on the latest figures, from its previous level of 3.9 per cent.

The bank could still raise Australia’s interest rates, for the second time in the current cycle, when its board meets on Melbourne Cup day, next month.

The bank’s Governor, Glenn Stevens, has made no secret of the fact that he is  particularly worried about the risk of another bout of house price inflation.

That threat arises, largely, from the fact that Australia’s population growth exceeds the present pace of home construction.

A survey, that the Housing Industry Association published earlier this week, also showed that land prices, in major Australian cities, are already rising strongly.

The Bureau’s figures already show that housing prices rose 5.5 per cent over the past year.

But transportation costs fell 5.1 per cent in that time as a result of both lower fuel prices and the stronger $A.

Lower interest rates contributed to a 7.2 per cent fall in the cost of finance and insurance services.

But education costs rose by 5.6 per cent over the year.


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Profile

Alan ThornhillAlan Thornhill is a parliamentary press gallery journalist. Private Briefing is updated daily with Australian personal finance news, analysis, and commentary.

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