Inflation plummets to 20-year low

The new Consumer Price Index (CPI) figures, released by ABS on Wednesday, show that on a calendar year basis, CPI rose 1.5 per cent, the first time since 1997 that the index grew by 1.5 per cent or less.

The figure is some way below the Reserve Bank of Australia’s (RBA) inflation target, which is set at between 2 and 3 per cent over the medium-term.

Combined with a low Aussie dollar, the CPI has led many to forecast that the RBA would cut the cash rate again this year, despite it being held at a record low of 1.5 per cent since August 2016.

Taking to Twitter, Shane Oliver, chief economist at AMP Capital, noted that inflation continues to run “well below target” and will “likely take longer for underlying [inflation] to get back to target than RBA is allowing”.

He added: "It keeps the prospect of another rate cut well and truly alive."

However, while Mr Oliver said that a cash rate cut would “maybe not” come as early as February, he suggested that the bank was “thinking [a cut could come] in May”.

Despite this, ANZ senior economist Jo Masters said that “inflation is stabilising” and suggested that it has “no immediate policy implication”.

She commented: “Today’s inflation data suggest that the sharp disinflationary forces that have been weighing on prices are abating and that inflation is stabilising.

"Headline CPI was in line with our expectations at 0.5 per cent q/q, while underlying inflation was a touch weaker at 0.4 per cent q/q. This data is consistent with the RBA’s forecast profile and has no immediate policy implication.”

However, Ms Masters added that while the stabilisation in inflation would be welcome, the bank expects to “see inflation running below the policy target band until H2 [the second half of] 2017”.

On a quarterly basis, headline CPI rose 0.5 per cent in the December 2016 quarter, down 0.2 per cent on the previous quarter.

According to the run down, the most significant price rises in the last quarter were for tobacco (up 7.4 per cent), largely due to “flow-on effects” from the federal excise tax increase that came into effect on 1 September 2016.

At the other end of the scale, there was a very weak increase in rental inflation, which rose by just 0.1 per cent quarter-on-quarter, while new dwelling purchase costs rose 0.5 per cent on the September quarter.

[Related: ‘RBA will cut again,’ says economist]