Australia Inflation Quickens to Fastest Since 2008 on Covid Jolt

(Bloomberg) -- Australia’s consumer-price growth surged in the three months through June, joining a number of developed economies in recording a jump as a result of lockdown-induced weakness in the corresponding quarter of 2020.

Inflation accelerated to 3.8% in the second quarter from a year earlier, the fastest pace since 2008, compared with a median forecast of 3.7%, data from the Australian Bureau of Statistics showed Wednesday. From the first three months of the year, the rate was 0.8% versus a forecast 0.7%.

“The big question is how much of the annual rate will hang around in the system,” said Craig James, chief economist at Commonwealth Bank of Australia’s securities unit. “Already higher prices for petrol and a raft of goods in short supply have served to push up inflation expectations. But once global production levels lift to more normal rates, supply and demand will be better balanced and some of the ‘transitory’ boost to prices will be removed.”

The Australian dollar edged a little lower after the release to trade at 73.57 U.S. cents at 12:14 p.m. in Sydney. The yield on 10-year Australian government notes fell 4 basis points to 1.16% in response to souring global risk sentiment.

Inflation is expected to dissipate as price indexes lose the boost from the comparison with the depths of the pandemic last year, underscoring why policy makers are still running record-low interest rates and bond-buying programs. Australia could be headed for a renewed bout of price weakness with Greater Sydney in lockdown for an extended period as it struggles to contain an outbreak of the delta variant of the coronavirus.

“The annual CPI movement was significantly influenced by Covid-19 related price changes from this time last year,” Michelle Marquardt, head of Prices Statistics, said in a statement. “Key drivers included the full unwinding of the Federal Government’s free childcare package” and “a full return from the drop in fuel prices,” she said.

Other details in the report include:

• The most significant rises in the second quarter were automotive fuel, up 6.5%, and medical and hospital services, up 2.4% due to the annual increase in private health insurance premiums
• Domestic holiday travel and accommodation fell 1.3% due to lower airfare prices. Increased competition and the government’s tourism package, which included subsidized airfares to selected destinations, drove the decline

Today’s report showed the trimmed mean core inflation gauge advanced 0.5% from the first three months of the year, matching economists’ estimates. Compared with the prior year, the index rose 1.6%, matching the median projection.

RBA chief Philip Lowe earlier this month announced a slight paring back in bond buying to reflect the strength of the economy. However, the sharp deterioration in the Covid situation since then is prompting some economists to predict he will defer that taper at next week’s meeting. Many now expect the economy to contract this quarter.

Lowe has struggled to return inflation to the 2-3% target during his almost five years at the helm and had been using the crisis to try to tighten the labor market sufficiently to spark wage-push inflation. The current round of lockdowns is likely to set that back as jobs are lost from firms forced to shutter.

Today’s report showed the weighted-median gauge, another core measure, advanced 0.5% in the second quarter for an annual increase of 1.7%, both in line with estimates.

Tradables prices, which are typically impacted by the currency and global factors, rose 1.5% in the second quarter from the previous three months. The Australian dollar has fallen about 4% in the past six months.

Non-tradables, which are largely affected by domestic variables like utilities and rents, advanced 0.3%.

“With the Sydney lockdown in its fifth week and unlikely to end soon, now is not the time for detailed deliberations on monetary policy settings,” James said. “Clearly significant fiscal and monetary policy stimulus is required to support businesses and workers – those in lockdown and those that are just starting to emerge.”

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