Inflation eases to within RBA target

Inflation has dropped back within the Reserve Bank of Australia's (RBA) target band
for the first time in over a year, and is likely to fall further as the global
recession saps demand.
The latest official readings of inflation were released on Wednesday as Prime
Minister Kevin Rudd echoed Glenn Stevens' comments on Tuesday when the RBA governor
said Australia is in recession.
This was a harder line than on Monday when Mr Rudd had said a recession was
"inevitable".
The consumer price index (CPI) grew by 2.5 per cent annually in the March quarter
compared with 3.7 per cent in the year to December 2008.
It had touched 5.0 per cent in the 12 months to September 2008.
Treasurer Wayne Swan said it was the first time the CPI had been within the RBA's
two to three per cent target band since late 2007.
"Over the past year, inflation has moderated significantly as the deepening global
recession has lowered previous demand pressures," Mr Swan told reporters in
Canberra.
"A further easing in inflationary pressures is expected as the effects of the global
recession continue to impact on the domestic economy."
In the March quarter, prices rose by a mere 0.1 per cent, a minor rebound after the
0.3 per cent fall in the December quarter.
The benign outcome reflected a 14.1 per cent price slump in deposit and loan
facilities and an 8.1 per cent drop in petrol prices.
However, pharmaceuticals jumped 13 per cent, education fees were up 7.6 per cent,
vegetables increased 6.0 per cent and rents rose 1.7 per cent.
"The headline inflation figure disguises the fact that living expenses of working
families such as food, housing, health and education have risen significantly over
the past year," ACTU president Sharan Burrow said.
Underlying inflation measures - the trimmed mean CPI and the weighted median CPI -
which the RBA uses to determine monetary policy decisions were also less benign.
The average of the two was a 1.1 per cent rise in the March quarter, the same as the
previous three months.
The average annual underlying rate was 4.2 per cent.
Mr Swan expects these measures will come down over time, but economists said it adds
to the case that the RBA may take a pause on interest rates over the next few
months.
"We may not be too far from the end of this easing cycle," RBC Capital Markets
senior economist Su-Lin Ong said.
"Nevertheless, the improving core inflation outlook, rapidly rising unemployment
rate, and still challenging global backdrop suggests that the risk remains skewed
towards further modest cuts later in 2009."
Ms Ong still expects the cash rate, which stands at 3.0 per cent, to fall to a
trough of 2.5 per cent.
Other data showed demand for skilled labour has dropped 61 per cent in the past year.
Mr Swan said he expected the International Monetary Fund (IMF) would downgrade its
global growth forecasts in a report due to be released later on Wednesday.
He said an IMF report on Tuesday painted a "sobering picture" of the ongoing
challenges facing the global financial system.
Speaking in Perth, Mr Rudd said the nation had been dragged into recession, which
had "also produced the single biggest collapse in tax revenues in post-war
Australia".
Opposition Leader Malcolm Turnbull said it was far more important to deliver
policies to improve the economy than arguing over the definition of recession.
"The real issue is, what are we doing to get out of it?" Mr Turnbull asked.
"Mr Rudd's had his two cash splashes. He said they'd create jobs. Have they created
jobs? No."
But Mr Swan said it was "undeniable" that the economy was better off as a result of
the government's economic stimulus packages.
"There is ample evidence around that economic stimulus has worked, is working and
will continue to work," he said.