Import price drop aids tamer inflation

Expectations that the annual rate of inflation is set to fall below the Reserve Bank
of Australia's (RBA) target band were backed by a sharp drop in import price data
released on Friday.
But a much larger and record tumble in export prices in the June quarter confirmed a
massive hole in the nation's income that is hurting corporate profits and government
revenues, economists say.
The federal government has estimated some $210 billion will be lost in government
revenue between 2008/09 and 2012/13 because of the global recession.
Economists expect next Wednesday's consumer price index (CPI) will show annual
inflation shrinking to around 1.5 per cent in the June quarter and below the RBA's
two to three per cent target band.
This compares with a rate of 2.5 per cent in the year to March and substantially
below the recent inflation peak of 5.0 per cent set in September last year.
RBA Governor Glenn Stevens last week reiterated that the central bank has scope to
cut the cash rate again "if needed", given the decline in inflation.
But a growing number of economists believe the RBA has done enough in lowering the
cash rate by 425 basis points to a 49-year low of 3.0 per cent since September last
year.
"(Friday's) data are consistent with the RBA's easing bias, although we remain of
the view that the cash rate has troughed for this cycle," RBC Capital Markets senior
economist Su-Lin Ong said in a research note.
Even though the CPI may drop below the inflation target band, the more
policy-sensitive underlying measures of inflation are expected to remain above three
per cent for now, economists say.
The Australian Bureau of Statistics' trade price indexes released on Friday showed
the import price index fell by 6.4 per cent in the three months to June, a record
for this series that started in September 1981.
The fall was despite a 6.1 per cent jump in petroleum products during the quarter
being partly offset by a stronger Australian dollar against all major currencies.
The ABS said there was a 13.3 per cent decline in `miscellaneous manufactured'
imported articles and a 22.8 per cent drop in iron and steel import prices.
Export prices suffered an even bigger fall due to the strength of the Australian
currency and the impact of lower annual benchmark prices for coal and iron ore.
The ABS's export price index tumbled by 20.6 per cent in the June quarter, the
largest decline since this series began in September 1974.
This saw the country's terms of trade - the net income from exports relative to
imports - fall by over 10 per cent.
"Australia has escaped a technical recession via GDP (gross domestic product)
expenditure, but you cannot indefinitely ignore the dire state of the income side of
the ledger," TD Securities senior strategist Annette Beacher said in a research
note.
"While no Armageddon, this income loss will eventually impact on the broader
economy. You cannot have continued expenditure without income."
The large decrease in the export index was driven by a 36.8 per cent collapse in
coal prices and 23.5 per cent slump in ore prices.
It was only partly offset by a 12.9 per cent rise in exported petroleum products.
Liberal senator for Victoria Julian McGauran said Mr Stevens and his board had again
misread the economy and inaction in lowering interest rates since April was
seriously damaging Australia's export market.
"A decrease in interest rates would reduce the value of the Australian dollar and
assist thousands of export businesses increase productivity and, at the very least,
protect their viability in recessionary times," he said in a statement.