Australia’s Consumer Prices Less Than Expected

Introduction

Australia’s consumer prices have showed a slightly lower increase than was expected. According to the Statistics Bureau of Australia, the forecasts had been drawn by a group of 25 economists. The low price increase resulted in a dip in the rate of inflation. On the whole, it shows that the economy is improving. However, sectors that are most likely to experience a dip such as the tourism sector experienced the dip due to the end in the December holiday season (Hausman 2003).

Core gauges

Australia‘s core inflation went down last quarter making the currency drop by 0.5 cents as investors trusted that the rate of interest would not increase. The trimmed mean value of core prices rose 0.5% from the quarter ended December 2013. The bureau of statistics said that the trimmed mean value had been predicted as 0.7% gain. The consumer price index rose 0.6% from the previous quarter compared with a 0.8% median estimate. The data brought down expectations that the looming housing boom and drop in unemployment would persuade the Reserve Bank to increase the interest rate above the current 2.5%.  However, RBA has maintained the rate of interest. The central bank has lowered borrowing charges by 2.25% points since 2011 as the Australian dollar’s strength went down on growth and a mining investment boom kept looming.

Tradable and non-tradable values

The price of non-tradable goods such as fast-food and utilities went up 3.1% from early last year. Tradable goods had their prices rise 2.6%. According to the Statistics Bureau of Australia, tradable goods include goods and services whose prices are majorly dependent on the international market. Non-tradable goods are mainly goods that are produced for internal consumption mainly since they cannot be transported in due time.

Other changes

The currency fell after the report was read by a small margin. The Australian dollar rose by 3.9% showing the largest increase amongst the 10 group of legal tenders, the kiwi exempted. The report shows a decline in prices of clothing and footwear by 2.1% while there was an expected decline of 1.5% while furnishing and household goods and equipments fell by 1.5%. Education cost gained by 5.1% from a quarter ago while health increased by 2.6%. The increase in the price of education was majorly owing to the start of the school year (Liddle, Lyth & Daly 2001).

The weighted median value, which is also used in the measurement of inflation, recorded an increase in showed an increase of 0.6 % compared with an estimated 0.7% gain. On an annual scale, the trimmed mean gauge rose 2.6% compared to the 2.9% forecast. The weighed median increased 2.7% against an estimated 2.9%.

The central bank aims at 2-3% inflation rate. The consumer price index increased 2.9% in Q1 from the quarter ended March 2013. A report released by the bureau also showed a seasonally adjusted consumer price index with a 0.5% increase last quarter for an annual gain of 2.9%. The reserve bank of Australia cut interest rates following the instability due to the looming mining boom in the North and west.

Rate of unemployment

Unemployment rates declined in March from 6.1% to 5.8%. The number of full-time jobs went down by 22100, while part-time employment went up by 40200. Australia’s rate of participation that measures the work-force in comparison to the population went down to 64.7% in March from a revised 64.9 a month earlier. About 50,000 in the automobile industry since the Toyota Motor Corp. in February declared that plans to quit its operations in the country just like General Motors Company and Ford Company (FRENKEL 2004).

Analysis

The report, therefore, showed an inflation that was lower than expected. The low inflation implies that the cost of goods is rising at a much lower rate (Baker & Economic Policy Institute 1998). This slow rise in cost of goods results in several things. First, a falling rate of inflation results in sluggish economic increase and higher unemployment levels. If the rate of inflation continues falling, people are reluctant to spend and therefore it results in slower economic growth. However, falling rate of inflation also has benefits. First, the export market improves. This is because the cost of goods in other countries rise faster than those of your own country. Secondly, low inflation rate encourages investment.

Graph showing comparison between the forecasted real quarter 1 values

In the Australian report, we see a slight decline in the rate of inflation. The small decline in the inflation rate is a good indication for both the end users and the investors. It makes investors to trust an economic system and the consumers are not discouraged from spending. An inflation rate of 2-3% has also been proved to show a stable stock market.

The most noteworthy increases in prices were those of tobacco, fuel, education (secondary and tertiary), pharmaceutical products, and medical and hospital services. They were, however, partially counterbalanced by the fall in furnishings, vehicle repair and maintenance, international travel and recreation (Hausman 2003). Tobacco prices went up as a result of an increase in tobacco duties. Education prices went up as a result of the beginning of a new school year. As for international and local travel, recreation, and accommodation, the prices could have gone down due to a drop in expenses following the end of the holiday season in December.

The consumer price index of an economy is the quantity of money that is required by a household to buy a basket of market goods and services. The goods in the basket are usually the most important goods for a household and they are weighted by order of importance (Baker & Economic Policy Institute 1998). The consumer price index has three major uses. First, it is widely accepted as the measure of inflation. This mainly results from its ability to influence the formulation of government policy and to check its effectiveness (FRENKEL 2004). Secondly, it is used a deflator. It translates retail sales, timed earnings, and parts of the national salary accounts to free dollars. Finally, it acts as a basis for the cataloguing of the consumer income payments, helps determine state aid and automatic economic adjustment for the members of the economy.

Conclusion

In conclusion, the report shows a small inflation. A slight inflation is a good sign of economic growth. The rate of inflation shown falls within the Central bank’s target of 2-3%. This is a good sign and will lead to a good consumer and investor confidence. Growth rate is, however, likely to go down as it is the first of its kind in some time. To cushion the economy, the reserve Bank has decided to keep its low interest rates to encourage borrowing.

References

Baker, D., & Economic Policy Institute (1998). Getting prices right: The debate over the consumer price index. Armonk, N.Y: M.E. Sharpe.

FRENKEL, R. (2004). Real exchange rate and employment in Argentina, Brazil, Chile and Mexico. Iktisat Isletme Ve Finans. doi:10.3848/iif.2004.223.5744

Hausman, J. (2003). Sources of Bias and Solutions to Bias in the Consumer Price Index. Journal of Economic Perspectives. doi:10.1257/089533003321164930

Liddle, A. R., Lyth, D. H., & Daly, R. A. (2001). Cosmological Inflation and Large-Scale Structure. Physics Today. doi:10.1063/1.1397398