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Australia inflation edges up but still below target

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Australian inflation ticked higher in the final quarter of 2019 but core measures remained subdued despite three interest rate cuts, suggesting the country's central bank will have to do more to revive consumer prices.

[SYDNEY] Australian inflation ticked higher in the final quarter of 2019 but core measures remained subdued despite three interest rate cuts, suggesting the country's central bank will have to do more to revive consumer prices.

The consumer price index (CPI) rose 0.7 per cent in the December quarter, higher than forecasts of a 0.6 per cent increase, driven by gains in cigarettes, domestic holidays, travel, fuel and fruit prices.

The annual pace rose to 1.8 per cent, still below the floor of the Reserve Bank of Australia's (RBA) 2-3 per cent target band. Indeed, a key measure of core inflation was stuck at an even slower 1.6 per cent marking four straight years below target.

This persistent weakness was one reason the RBA cut interest rates three times last year to an all time low of 1.75 per cent, and why markets are still pricing in at least one more easing.

The central bank holds it first policy meeting of the year next week but is thought likely to stand pat given a recent welcome dip in the unemployment rate.

Futures imply a less than 15 per cent chance of an easing on Feb 4, though that rises to over 70 per cent by April.

While the rate cuts to date have succeeded in reviving home prices, consumers remain burdened by stagnant wage growth and record-high debt levels.

Weeks of raging bushfires have further darkened the mood, as has the outbreak of coronavirus and its baleful impact on Chinese tourism to Australia.

Some of the increase in prices was due to drought and lower seasonal supplies of fruit, vegetables and meat. Economists expect the bushfires and the ongoing drought to further push up prices in coming months.

Ivan Colhoun, a senior economist at NAB, estimates the fires could shave 0.4 per cent points off economic growth this quarter, while the virus could cost A$1 billion to A$2 billion in lost tourism revenue.

Both were badly timed given domestic consumers were already inclined to save rather than splurge.

"There is little evidence of either tax cuts or interest rate reductions feeding into increased consumer spending," noted Mr Colhoun.

"We continue to see two further rate cuts this year and the possibility of quantitative easing if the unemployment rate deteriorates more quickly than we forecast."

REUTERS