Inflation will stay “moderate”: Swan

Australia’s inflation will “remain moderate” in the months ahead,  the Federal Treasurer, Wayne Swan says.

We will all have to wait until May 4, though, to find out whether the Reserve Bank sees something more serious, in the latest Consumer Price Index figures.

These show  inflation rising 0.9 per cent in the March quarter and by  2.9 per cent in the year to March 31.

The December quarter rise was just 0.5 per cent and the annual inflation rate for 2009  was 2.1 per cent.

The Reserve Bank board will meet next Tuesday 4 to review Australia’s interest rates.

The bank has already warned that Australians cannot expect interest rates to remain below normal levels indefinitely.  And it has raised those rates at five of its last six monthly meetings.

Mr Swan is clearly right about one thing.  Some increase in Australia’s inflation rate was to be expected, as the nation’s recovery from the global economic crisis gathered strength.

However, a 6.1 per cent rise in house prices, over the past year, will  still worry the bank.

It was less worried yesterday, though, by a new ripple on the global scene,  the reduction of Greece’s debt to junk bond status.

The bank is regarding that, so far, as a purely European problem, even though it has already rattled world share markets.

Higher health and education bills are also putting strong upward pressure on Australia’s inflation rate.

Australia’s surging coal and iron ore booms, though, remain the most dangerous inflationary forces, on Australia’s economic horizons.

Oddly, though, Australia’s underlying inflation rate appears to be easing.

On a measure known technically as the “weighted median,” underlying inflation fell from a revised annual level of 3.5 per cent, at the end of December to 3.1 per cent,  at the end of March.

The Reserve Bank takes underlying measures of inflation, like these, into account, rather than the raw Consumer Price Index, or “headline” figures, when it sets rates.

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

The bank’s marker interest rate is now at 4.25 per cent.  Economists say the “normal” rate is somewhere between 4.5 and 5 per cent.

Mr Swan said measures of underlying inflation had eased, over the past year, as the global economic crisis made itself felt.

“Inflation moderated substantially over the course of 2009, with the global recession resulting in a substantial reduction in aggregate demand pressures,” the Treasurer said.

“The outlook is for inflation to remain moderate in the near term,” he added.