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Australian inflation stays muted amid Covid-induced noise

[SYDNEY] Australian consumer prices surged last quarter as one-off rebates linked to the coronavirus reversed and petrol prices rebounded, yet annual inflation stayed stubbornly below target in a green light for further policy easing.

The headline consumer price index (CPI) rose a steep 1.6 per cent in the September quarter, but that merely retraced the June quarter's record 1.9 per cent plunge.

The statistical noise was largely caused by government rebates for child care amid a coronavirus lockdown and a whipsaw in global oil prices, both of which proved temporary.

Annual inflation picked up to just 0.7 per cent, having fallen 0.3 per cent in the June quarter for the first negative reading since 1998.

Yet the bounce still left inflation well below the floor of the Reserve Bank of Australia's (RBA) 2-3 per cent target band and, with the economy only just emerging from recession, is set to stay sub-par for a long time to come.

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"Inflation is expected to remain subdued for some years," said analysts at NAB. "This is due to elevated unemployment and weak demand."

Lockdowns for the coronavirus tipped the economy into its first recession since the early 1990s and left more than a million Australians out of a job.

That in turn is weighing heavily on wage growth and key measures of core inflation. Trimmed mean inflation, a gauge favoured by the RBA, rose by an annual 1.2 per cent in the September quarter and the central bank itself sees it edging up to just 1.5 per cent by the middle of 2022.

All of which is why the RBA is considered likely to cut interest rates to a fresh record low of 0.1 per cent at its November policy meeting next week, down from an already wafer-thin 0.25 per cent.

Analysts also assume the RBA will join many of its peers by embarking on quantitative easing, buying billions of dollars of government bonds in the five to 10-year bracket.


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