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Australia Headline Inflation Beats Estimate as Drought Bites

Michael Heath

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Australia’s headline inflation outpaced economists estimates in the final three months of 2019, advancing at the fastest quarterly pace in three years as oil gained and drought bumped up food prices.

The consumer price index advanced 0.7% from the third quarter, compared with a forecast 0.6% gain, and 1.8% from a year earlier, versus an estimated 1.7%, data from the Australian Bureau of Statistics showed on Wednesday.

“Food price inflation is set to remain elevated, with the impact of the recent bushfires, which has disrupted some transport links, combining with the drought,” said Sarah Hunter, chief economist for BIS Oxford Economics. “Conditions remain challenging for retailers, which will limit any increases, and the tourism sector may resort to discounting to encourage travelers, and offset the drag from the bushfires and the coronavirus.”

The Australian dollar rose after the report, edging up to 67.70 U.S. cents in Sydney from about 67.62 cents prior to the release. It was trading at 67.70 at 12:22 p.m.

Reserve Bank of Australia chief Philip Lowe has battled for the past 3-1/2 years to reignite prices, but with limited success despite three interest-rate cuts since June. He’s not alone: developed-world counterparts are similarly struggling to rekindle inflation even with tighter labor markets than Australia’s.

The central bank convenes for its first policy meeting Feb. 4 and traders are pricing in little chance of any change after the jobless rate fell in the final two months of 2019. Lowe estimates the RBA has two cuts left in its arsenal before reaching the effective lower bound, which would open the door to unconventional policy.

Core Inflation

Wednesday’s inflation report showed the trimmed-mean gauge -- a key core measure -- gained 0.4% in the fourth quarter, matching estimates, and 1.6% from a year earlier. The Reserve Bank targets consumer-price growth of 2%-3% over time.

The weighted-median gauge, another core inflation measure, advanced 0.4% in the final quarter of last year, matching forecasts, and 1.3% from a year earlier.

Returning to headline inflation, the report showed fruit prices jumped 6.8% in the period as drought conditions reduced supply and fuel costs advanced 4.4%. Domestic holiday and travel and the annual tobacco excise also contributed to the headline inflation gain.

What Bloomberg’s Economists Say

“The 4Q19 inflation outcome is enough, when combined with the stronger than expected labor market data, to keep the RBA on hold in February. Slightly stronger than expected headline inflation reflects temporary, transitory, or taxation-related, factors. A significantly tighter labor market and stronger private sector demand is needed for Australia’s economy to generate a sustained lift in underlying inflation pressure.”

James McIntyre, economist

The Australian dollar has depreciated more than 5% in the past 12 months, lifting the cost of imports. While that would typically feed through to faster tradables inflation, embattled retailers fending off fierce competition from global rivals have been loath to pass on higher prices to debt-stretched consumers.

Tradables goods prices rose 0.2% in the quarter from the previous three months. Non-tradables, which are affected by domestic conditions and administered prices, rose 1%.

The RBA sees faster wage growth as the most realistic path to lifting prices and Lowe estimates unemployment needs to fall to at least 4.5% -- from the current 5.1% -- to make this happen.

Lowe is due to give a speech a day after next week’s rate decision and the bank releases updated quarterly forecasts on Feb. 7. Today’s outcomes were in line with the bank’s forecasts.

(Updates with comment from economist in third paragraph. An earlier version of the story was corrected to fix the year in the first paragraph)

To contact the reporter on this story: Michael Heath in Sydney at mheath1@bloomberg.net

To contact the editors responsible for this story: Paul Jackson at pjackson53@bloomberg.net, Alexandra Veroude, Malcolm Scott

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