Cheap money here to stay as inflation hits 70-year lows

The era of ultra-low rates shows no sign of ending any time soon, after the Reserve Bank’s preferred measure of underlying inflation fell to its lowest since at least 1949.

COVID has made inflation a mixed bag. Picture: David Geraghty

The era of ultra-low rates shows no sign of ending soon, after the Reserve Bank’s preferred measure of underlying inflation fell to its lowest level in more than 70 years, with economists saying there was no evidence that the post-COVID rebound had translated into broad consumer price pressures.

The Australian Bureau of Statistics’ “trimmed mean” measure of consumer price growth, which excludes the most volatile items, dropped to 1.1 per cent over the 12 months to March, from 1.2 per cent in the previous quarter and to its weakest since at least 1949.

EQ Economics managing director Warren Hogan said it was likely the lowest reading since the Great Depression.

RBA governor Philip Lowe has said he would not raise rates from 0.1 per cent until annual core inflation returned sustain­ably within the 2-3 per cent target range — a goal the central bank does not expect to achieve until 2024 at the earliest.

“This kills off any talk of the RBA needing to do anything (to tighten policy) earlier,” Mr Hogan said.

Underlying inflation fell to 0.3 per cent in the quarter, from 0.4 per cent. Economists had expected it to lift to 0.5 per cent.

“The data presents a clear indication that despite a globally enviable post-COVID activity recovery, the economy is unable to generate inflation pressures that would allow the RBA to unwind its highly accommodative monetary policies,” Citi chief economist Josh Williamson said.

With labour accounting for about 70 per cent of business costs, it was unlikely that inflation would meaningfully lift until wages growth climbed from its historical low, Mr Hogan said.

The ABS data revealed the broader “headline” inflation number crept up to 1.1 per cent over the year to March, mostly thanks to sharply higher petrol prices, as the federal government’s HomeBuilder grant offset climbing building costs.

 

Growth in the consumer price index fell to 0.6 per cent over the first three months of the year, from 0.9 per cent in the previous quarter. The most significant price rise over the 12 months to March was for fuel, which jumped 8.7 per cent, while the largest fall was for furniture, which dropped by 3 per cent.

ABS head of prices statistics Michelle Marquadt said “higher fuel prices, compared with the low prices seen in 2020, accounted for much of the rise in the March quarter CPI”.

Climbing consumer confidence into the new year drove a jump in demand for accessories, where prices climbed by 7.3 per cent in the March quarter, with the ABS noting jewellers had been able to “pass through elevated input costs” to customers.

Housing costs, which represent the largest share of the basket of consumer prices, were weak and government COVID policy measures continued to influence prices. There was a 0.1 per cent decline in the price for new dwellings, as schemes such as the federal government’s Homebuilder grant — alongside similar incentives by the West Australian and Tasmanian governments — offset climbing building material and labour costs amid a residential construction boom, the ABS said.

Rents were unchanged in the quarter. The pandemic has driven wild swings in the consumer price basket. Free childcare and rent relief during the June quarter of 2020 resulted in a 1.9 per cent fall in the headline CPI figure, followed by outsized quarterly gains of 1.6 per cent and 0.9 per cent over the second half of the year.