Spending habits sink inflation rate further

Australian’s already anaemic inflation rate looks set to be revised lower as changing spending habits by consumers are taken into account, further pushing out the day when interest rates might rise from record lows.

A five-year update of household spending patterns issued on Monday by the Australian Bureau of Statistics (ABS) implied the consumer price index (CPI) was overstating inflation by around 0.22 percentage points.

That might not sound like much, but annual inflation was already surprisingly low at 1.8 per cent in the third quarter and, crucially, short of the Reserve Bank of Australia’s (RBA) target band of 2 per cent to 3 per cent.

The new weights for the CPI suggested inflation was actually only 1.6 per cent last quarter.

‘‘It is clear is that the reweighting of the CPI will make it increasingly hard for the RBA to hit its inflation target in the medium term,’’ said Westpac economist Justin Smirk.

‘‘The Australian economy just does not have the inflationary impulse in the sectors that are inflating to offset the disinflationary pressures that dominate the consumer retailing space.’’

That would be a setback for the RBA which had forecast CPI inflation would rise to around 2 percent by the end of this year and increase gradually thereafter.

Investors have already pushed out the timing of any hike in the current 1.5 per cent cash rate.

The futures market is now not fully pricing in a move until early 2019, a marked change from a couple of months ago when it was implying a hike by August 2018.

The adjustments follow a reweighting of the goods and services contained in the CPI to reflect how spending patterns have changed over the past five years. In particular, consumers tend to substitute towards items that have become relatively less expensive, and away from items that have become more expensive. - Reuters