Rise in inflation throws rate hike into question

The consumer price index rose by 0.9% in the June quarter, according to the Australian Bureau of Statistics, throwing into doubt the timing of the next interest rate rise.

Economists’ forecasts for the headline consumer price index had centred on a 0.8% rise in the quarter, for an annual inflation rate of 3.5%.

The 0.9% rise took the annual inflation rate from 3.3% to 3.6%, the highest level since 2008.

The headline result was dominated by big rises in fuel and fresh fruit, which jumped 26.8% in the quarter and 66.5% over the year, mainly caused by Cyclone Yasi.

According to the ABS, banana prices were up by about 138% in the June quarter, and 470% over the March and June quarters combined.

Excluding fruit and fuel, the CPI would have risen by 0.4% in the quarter and 2.6% through the year.

The strength of the underlying measures suggests inflationary pressures may be uncomfortably strong, regardless of fruit or fuel prices.

Uncertainty over the fiscal troubles of the United States and Europe – along with data suggesting Australia is taking longer than expected to get through the current soft patch – mean the Reserve Bank will most likely hold off a rate rise.

But if those negatives dissipate, these inflation numbers will help to get rate hikes back onto the agenda.

However, RBA governor Glenn Stevens has told struggling retailers not to panic, claiming consumer spending will eventually start to pick up.

“It is entirely possible that, were some of the current raft of uncertainties to lessen, the mood could lift noticeably, so I don’t think we need to be totally gloomy,” Stevens said this week.

Stevens said he understood why households were wary after the GFC and during the current economic collapses in Europe, and the budget disaster which threatens the US.

“The anxiety has extended to Australia, even though… Australia is in the midst of a once-in-a-century event in our terms of trade.”

Stevens’ comments are in stark contrast to Nielsen’s latest Global Online Consumer Confidence Survey, which shows Australian consumer confidence fell seven points in the second quarter.

The survey is based on the responses of more than 31,000 consumers in 56 countries. Consumer confidence levels above a baseline of 100 indicate degrees of optimism and below 100 indicate pessimism.

Australia’s index from 110 points in the first quarter to 103 points in the second quarter.

“Australian households are being hit hard with unrelenting price increases across the board,” Nielsen spokesperson Chris Percy says.

“Consumers were aware that from July 1, households would be hit by one of the biggest rises in the cost of living in decades – utility bills – with electricity, water and gas prices all increasing.”

“The January floods, which restricted supplies of fruit and vegetables, have had lingering effects on produce costs, causing food prices to rise. Belt-tightening is the norm for many households as price increases across multiple sectors continue to erode many family budgets.”

Percy says Australia is currently a “polarised nation” facing falling asset prices, high levels of government debt, growing inflation and rising interest rates.

“Yet it is a country with low unemployment, a booming resources sector and one of the strongest currencies in the world,” he says.

“It’s no surprise that consumers continue to be cautious in their borrowing and spending under such opposing fiscal conditions.”