Asia Economy

Australian consumer prices lifted by taxes, Covid stimulus in fourth quarter

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Key Points
  • Australian consumer prices rose a little faster than forecast last quarter as the unwinding of Covid-19 subsidies and higher tobacco taxes made an outsized impact, yet core inflation remained very much subdued.
  • The RBA aims to hold inflation in a 2-3% band over the long term, but it has been running below the floor for five full years and is projected to keep missing until at least 2023.
  • Some of the pick up stemmed from child care after the government unwound a subsidy offered during the heights of the Covid-19 lockdown in April and May.
Shelves where disinfectant wipes ,toilet tissues, bottled water, flu medicines are usually displayed are nearly empty at a local store on March 03, 2020 in Rhodes area, Sydney, Australia.
Izhar Khan | NurPhoto | getty Images

Australian consumer prices rose a little faster than forecast last quarter as the unwinding of Covid-19 subsidies and higher tobacco taxes made an outsized impact, yet core inflation remained very much subdued.

Indeed annual growth in the trimmed mean measure of underlying inflation stayed at a record low of 1.2% in the December quarter, a green light for the Reserve Bank of Australia (RBA) to keep policy super easy.

"The underlying weakness will remain for quite some time, notwithstanding the strength of the economic recovery thus far.

There is still some way to go before the labor market reaches full employment and upward pressure on wages resumes," said Sarah Hunter, chief economist for BIS Oxford Economics.

"And the weakness is broad-based, with falls in prices recorded in clothing, housing costs, household goods and services excluding childcare and communications."

The RBA aims to hold inflation in a 2-3% band over the long term, but it has been running below the floor for five full years and is projected to keep missing until at least 2023.

Given that outlook, the bank has pledged to maintain interest rates at the current record low of 0.1% for a further three years while also buying bonds to hold yields down.

Wednesday's data from the Australian Bureau of Statistics did show consumer prices (CPI) rose by a larger-than-forecast 0.9% at both a quarterly and annual level. Markets had looked for an increase of 0.7%.

Some of the pick up stemmed from child care after the government unwound a subsidy offered during the heights of the Covid-19 lockdown in April and May.

There was also a near 11% jump in tobacco prices due to higher taxes, again not a demand-driven move.

The impact of the virus was visible throughout the report, with the cost of domestic holidays rising as Australian states re-opened from lockdowns, while stimulus subsidies for home building and electricity leaned against inflation.

A dearth of foreign visitors and students coupled with a lifestyle shift toward buying detached houses, also saw rents barely rise after two quarters of falls.