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December inflation to remain tepid but no rates cut forecast


Australia’s inflation should remain soft in the December quarter, but that’s unlikely to sway the Reserve Bank to cut interest rates.

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The Consumer Price Index (CPI) is expected to rise by 0.3 per cent in the December quarter for an annual rate of 1.6 per cent, according to an AAP survey of 15 economists.

Underlying inflation, which strips out the effects of volatile price movements, is forecast to rise 0.5 per cent for the quarter and 2.05 per cent over the year.

The CPI will be released on Wednesday by the Australian Bureau of Statistics.

Headline inflation is expected to be curbed by sharp declines in fruit and petrol prices.

For underlying inflation, the main factors holding back price rises are strong foreign retail competition and slow wages growth, CommSec chief economist Craig James said.

“Interestingly the Aussie dollar fell by around 11 per cent in 2015 but so-called tradable goods prices only lifted 1.9 per cent over the year,” he said.

“Companies are clearly doing all that they can to avoid lifting prices, well aware that consumers have global choices about where they can buy their goods.”

James tipped prices of imported goods to creep higher over 2016.

“It will be important to watch the speed and extent of the pass through of the weaker exchange rate to imported goods prices,” he said.

The Reserve Bank should remain on hold in the coming months, given continuing solid employment gains and above average business conditions, National Australia Bank economists said.

“International developments have clouded this somewhat, but to date there has been little direct impact on the Australian economy,” they said.

ANZ economists said sluggish inflation provides leeway for further easing over 2016 should the economy soften, but it won’t be a catalyst for policy action.

“While lower commodity prices will continue to weigh on headline CPI, underlying inflation is forecast to move back within the RBA’s 2 to 3 per cent target band in early 2017,” they said.

Moreover, with the domestic non-mining sector doing better than expected outside of housing, the risks to inflation are tilted slightly to the upside, ANZ said.


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