The dollar giveth, and taketh away…

In economics, as in most areas of life, no news is entirely good or entirely bad.
The renewed vigour of the currency in recent months has frustrated hopes of a competitive boost for non-mining exporters and import-competing businesses.
But as the Government, the Reserve Bank of Australia and business groups fret over the sustained strength of the dollar (which has been above US90 cents for the last six weeks), it has also been working – along with tepid global growth – to help hold the cost of imports down.
This is made clear in the breakdown of inflation figures between tradable and non-tradeable items.
The cost of tradeable goods and services – that is, those items whose prices are largely determined on the world market – rose by 0.4 per cent in the March quarter. While the cost of fuel, tobacco and medicines all went up, these rises were offset to a considerable extent by cheaper furniture, clothes, shoes (thank you, Boxing Day sales) and overseas holidays.
In the same period, the cost of goods and services whose prices are largely determined by the domestic market, climbed by 0.7 per cent, driven by rising electricity charges, a seasonal jump in school and university fees, and annual cut in the percentage of patients qualifying for Medicare and PBS subsidies.
The ace in the hand for the RBA as it contemplates the official inflation numbers is that wages growth is being held well in check by soft economic conditions and elevated unemployment. The Wage Price Index grew by 2.6 per cent in the year to the December quarter.
While an underlying inflation rate of 2.65 per cent is above the mid-point of the central bank’s 2 to 3 per cent target band, there is little in the March quarter CPI figures that are likely to surprise or alarm the RBA.
Combined with the fact that wage pressures are moderate, and the possibility that the currency may stay higher for a little while yet, there is nothing in the inflation data to suggest the RBA Board needs to begin pushing up interest rates yet.

Some of the CPI detail:
Headline inflation: up 0.6 qtr/2.9 annual
Underlying inflation: up 0.55 qtr/2.65 annual

Main increases(%)
Tobacco – 6.7
Secondary school – 6
Medicine – 6.1
Fuel – 4
Vegetables – 3.3
Electricity – 1.4

Main falls(%) Furniture – down 4.3
Clothing and footwear – down 2.1
Internat. and domestic travel – down 2.4

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2 Comments

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2 responses to “The dollar giveth, and taketh away…

  1. Rob

    Another thought-provoking piece.
    Wages growth of 2.6% and underlying inflation of 2.65% effectively means no real wage growth. It doesn’t get better, as “the currency in recent months has frustrated hopes of a competitive boost for non-mining exporters” and against a backdrop of “tepid global growth”. All of which suggests the domestic growth outlook is looking rather benign. Maybe, the positive wealth effect, from strong house price growth and share values, may provide the saving grace for consumers.

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