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Australia inflation surprisingly subdued, rekindles rate cut hopes

Flag of Australia on a beach
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Flag of Australia on a beach

Australian consumer prices rose by less than expected last quarter while core inflation stayed stubbornly stuck at all-time lows, a subdued result that keeps alive some chance of yet another cut in interest rates.

Wednesday's data from the Australian Bureau of Statistics showed the consumer price index (CPI) rose 0.5 percent in the fourth quarter, from the previous quarter, missing forecasts of a 0.7 percent increase.

The annual pace did pick up to 1.5 percent, from 1.3 percent, but again undershot expectations. The biggest price rises in the quarter were for tobacco, petrol, domestic holiday travel and accommodation. Falls were seen for travelling abroad, accessories and waters, soft drinks and juices.

Key measures of underlying inflation that drive monetary policy also held around 1.5 percent, well short of the Reserve Bank of Australia's (RBA) target band of 2 to 3 percent.

"It keeps the prospect of another rate cut well and truly alive," said Shane Oliver chief economist at AMP Capital.

"We are thinking in May. These numbers highlight the downside risks to inflation in Australia and the risk that it will take longer to get back to target."

The Australian dollar dipped around a quarter of a U.S. cent to $0.7560 on the report. Futures markets still implied almost no chance of a policy easing, though investors did lengthen the odds of a hike late in the year.

Expectations turn for the better

The RBA already assumes it will take up to two years for inflation to move back within its target band and has repeatedly warned of the risks in trying to get it there sooner.

In particular, there are concerns further easing would only encourage more debt-funded speculation in the housing market, inflaming prices and stressing the banking system.

A major worry for the RBA has been that a damaging cycle could develop where slowing inflation led consumers and businesses to lower their inflation and wage expectations, which in turn drove actual inflation down further.

Wage growth has already braked to its slowest in two decades, with most industries paying less than 2 percent more.

Yet there have been signs recently that the greatest danger may have passed. Surveys of consumer inflation expectations have turned up, with the Melbourne Institute's weighted mean climbing 0.4 percentage points in January to 2.6 percent.

Market expectations of what the five-year outlook for inflation will be in five years time have also moved markedly higher, spiking to 2.78 percent last week from 2.48 percent at the start of October.

"It supports the view that consumer inflation expectations have stabilized, easing concerns in the middle of last year that expectations were at risk of becoming unanchored," said Tapas Strickland, an economist at NAB.

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