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Wednesday, January 28 2015

SHARP falls in oil prices have dragged inflation to near three year lows.

THE price of Australian consumer goods and services rose just 0.2 per cent, in the December quarter, for an annual rate of 1.7 per cent, official figures on Wednesday showed.

The consumer price index (CPI) figures were weaker than economists were expecting and fell below the RBA's two-to-three per cent target band for the first time since 2012.

But the weak result was mainly driven by recent sharp falls in the price of oil, which pushed the price of petrol down 6.8 per cent in the final three months of 2014, economists said.

Underlying inflation, which strips out the effects of such volatile price movements, actually came in stronger than economists were expecting, rising 0.7 per cent in the December quarter for an annual rate of 2.25 per cent.

And since that is the number the RBA focuses on, the latest inflation figures do not add to the case for a rate cut in the near term, National Australia Bank senior economist David de Garis said.

He said those figures were in line with what the RBA was expecting.

"The headline figure is important, right; it does effect people's pockets, but the RBA will focus on core rate," Mr de Garis said.

"There's not any evidence from CPI that would add to the case for a near term change in policy."

CommSec chief economist Craig James said the figures may sway the RBA toward a cutting bias, but did not deliver a smoking gun for a rate cut.

"The RBA has got to be looking much more in terms of internal price pressures, pressures that the economy is generating, and the major reason why inflation was on the low side was external influences that may not always be there," Mr James said.

"There's no smoking gun in the inflation figures to suggest the RBA can cut interest rates.

"Nevertheless, it may change the RBA's bias in the February decision to an easing bias away from their neutral stance because we do still have underlying inflation at the low end of the RBA's target band."
Posted by: Greg Carroll AT 12:35 pm   |  Permalink   |  Email