Australian price growth remains lacklustre

Summary:

• Australian headline inflation remained muted during the three months through September
• Retailers have so far failed to pass on higher costs to consumers
• The weaker Aussie is no longer an inflation driver partly due to fierce competition; the lessening meaning of trade unions may have also played a role

Headline price growth in the Australian economy remained lacklustre during the three months through September, underlining the need for the Reserve Bank of Australia to keep monetary policy accommodative. CPI ticked up to 1.7% from 1.6% in annual terms, matching the Bloomberg median estimate. On the other hand, the gauges of core price pressure remained unchanged at 1.6% in case of trimmed mean and 1.2% in case of weighted median. Both numbers were well below the RBA’s price objective seeking the annual pace of inflation between 2% and 3%.

Moreover, tradable prices grew only 1.2% from a year earlier, another disappointing outcome given the scale of Aussie dollar depreciation we have seen of late. Let us remind that the Australian dollar has already weakened over 15% since early last year, increasing notably price of imports. Nonetheless, retailers have thus far failed to pass on these higher prices to consumers who, in turn, have not seen healthier wage growth yet (the current pace is far below this one seen before the great financial crisis). We reckon that this phenomenon, present not only there, may have something to do with stiff competition as well as the lessening meaning of trade unions in the Antipodean economy. The latter may have reduced employees’ bargaining power in wage negotiations, and therefore put downward pressure on wage growth in general. Empirical evidence, resulting from our research, confirmed such thinking in case of the United States.

The weaker Aussie dollar has stopped exerting upward pressure on price growth. Source: Bloomberg