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Reflation Is Bypassing Australia and Isn't Expected Anytime Soon

  • Reweighting of local CPI basket could have deflationary effect
  • Economy appears stuck in low inflation environment: Westpac

The global reflation story appears to be bypassing Australia.

Core inflation unexpectedly slowed in the third quarter even amid soaring power prices, data showed Wednesday. There’s little chance of a near-term acceleration even as the recovery in developed economies strengthens: further weakness is expected from a reweighting of the consumer price index.

Read more about Australia’s third-quarter inflation report

“Inflation appears in a lot of places to have recovered from the absolute lows,” said Ben Jarman, an economist at JPMorgan Chase & Co. in Sydney. “In some of the developed economies where labor markets have tightened a lot, you’re seeing a gradual increase in inflation rates, with the U.S. probably the exception, but even there it’s starting to come through. But we’re skeptical that will play out here because we’re just in a different cyclical position.”

Australia’s outperformance of the developed world in the five years following the global financial crisis is returning to haunt it. Many of the problems stem from an overvalued exchange rate as the economy’s strength attracted capital worldwide; that’s required a form of domestic devaluation seen in very weak inflation and margin compression in retailers, according to Jarman.

The outlook for future inflation isn’t great either. Economists have said that a planned reweighting of items in the index’s basket by the Australian Bureau of Statistics could cut as much as 0.2 to 0.3 percentage points from CPI in coming quarters. All this is occurring as Amazon.com Inc.’s looming Australian debut threatens further declines in costs.

On the upside, a burst of hiring has seen Australia’s economy generate the equivalent in U.S. non-farm payrolls of 379,000 a month, while the jobless rate has fallen to 5.5 percent from 5.9 percent in the past six months. Indeed, Goldman Sachs Group Inc. says the economy may be on verge of “a positive inflection point” on wages that have been stagnant in recent years.

Among economists and traders, the general expectation is that the Reserve Bank of Australia will raise interest rates some time next year, in what would be its first hike since 2010. The biggest outlier is Bill Evans, chief economist at Westpac Banking Corp., who sees the central bank on hold until 2020.

“Broadly speaking, the Australian economy appears to be locked in a low inflation environment where there are some sectors experiencing modest inflation,” Westpac said after Wednesday’s report. “At this stage we struggle to find any broad cyclical upswing in prices that you would normally expect to see at this stage of the economic recovery.”

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