Australian inflation falls to 1.3% in biggest drop for seven years

Falling petrol prices pushed the cost of living down in the year to March, making fresh rate cuts by the Reserve Bank more likely

Australia’s inflation rate saw its biggest fall for seven years in the year to the March quarter, official figures have shown, making fresh interest rates more likely.

Falling petrol costs pushed the consumer price index 0.2% lower in the quarter to 1.3%, figures from the Australian Bureau of Statistics on Wednesday showed. It had been expected to rise 1.3%.

It was the first quarterly fall since the final three months of 2008 when the global financial crisis was at its height.

Annual underlying inflation, which strips out volatile price movements, was the weakest since records began in 1983, growing just 1.55%.

The Australian dollar dropped by more than 1.5% to US76.29c as expectations rose that the Reserve Bank would once again cut borrowing costs.

The local stock market climbed on the back of figures, however, as investors warmed to the idea of cheaper money. The ASX/S&P200 benchmark of leading shares was up 0.85% to 5,264 points at 12.30pm, before falling back to 5,232 by 2.30pm.

The inflation rate of 1.3% is well below the RBA’s target range of 2-3%, which increases the chances of an interest rate cut. Lower inflation will give more scope for the RBA to cut without risking more inflation in return if it decides the economy needs more stimulus.

Savanth Sebastian, an economist at CommSec, said: “It is pretty clear that inflation is not a threat to the domestic economy, meaning that the Reserve Bank can comfortably keep interest rates at exceptionally low levels over the medium term.

“Domestic inflationary pressures remain well contained and given the slow growth in wages it is unlikely to result in a change to the domestic inflation landscape.”

The sluggish rise in prices has been helped by the impact of lower oil prices on the cost of petrol, which dropped 10% compared with the previous quarter and is now selling for under $1 a litre at some garages.

The price of fruit was also singled out for mention by the ABS after it fell 11.1% while international holiday travel and accommodation fell 2%.

The falls were offset by higher secondary school fees ( up 4.6%), medical and hospital services (1.6%) and pharmaceutical products (4.8%).

In a sign that house prices are slowing, the housing component of the index rose just 1.7% over the the year to March – the lowest annual increase since December 1998.


Martin Farrer and agencies

The GuardianTramp

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