It was a problem that appeared to drop off the radar during the economic downturn, but inflation worries have quickly returned to haunt interest rate policy thinking.
At face value there would seem little to fret about.
The Consumer Price Index (CPI) annual rate is travelling at a relatively sedate pace - 1.5 per cent in the year to June - below the Reserve Bank of Australia’s 2 to 3 per cent target band.
And economists doubt that it will return to the band when the September quarter CPI is released next Wednesday.
The impact of the economic downturn unsurprisingly curtailed immediate price pressures and has seen the annual CPI rate tumble from a hefty 5.0 per cent in the year to September 2008.
However, it is the more interest rate policy sensitive underlying rates of inflation that the central bank appears to be more concerned about.
Its own measures - the weighted median and trimmed mean - are still remarkably high, averaging 3.9 per cent in the year to the June quarter, after peaking at 4.65 per cent in the year to September 2008.
These measures smooth out the bumps in the inflation equation from volatile items, such as petrol and food costs, and indicate whether price pressures have become embedded in the economy.
Nomura Australia chief economist Stephen Roberts agrees that underlying - or core - inflation has proved stubborn.
‘‘I think because they got so high ... it does take time to get down from those sorts of levels,’’ Mr Roberts said.
But it was comments in the minutes of the October RBA board meeting, released this week, that appear to have put inflation worries firmly back on the agenda.
Economists say the risk is that a solid rise in next week’s data may force the central bank to take a more aggressive approach to getting the official cash rate back to a ‘‘more normal’’ level.
‘‘While current forecasts suggested it would fall in the coming year, the expected trough in inflation was significantly higher than earlier thought,’’ the minutes said.
‘‘Keeping interest rates at very low levels for an extended period could therefore threaten the achievement of the inflation target over the medium term.’’
In its latest forecasts, published in August, the Reserve Bank predicted underlying inflation at 3.25 per cent in the year to December, and did not expect it to return to 2.5 per cent - or mid-range of the target - until the middle of next year.
Its October comments suggest those predictions were too optimistic.
Finance Minister Lindsay Tanner also conceded this week that while the global recession has suppressed inflationary pressures in the short term, they haven’t ‘‘entirely gone away’’.
‘‘We do have challenges on that front ... inevitably you are going to face that issue as a public policy challenge,’’ Mr Tanner said.
However, he said that while inflation pressures may reassert themselves as the economy returns to trend, growth was still ‘‘anaemic’’ at present.
Worrying about price pressures when the CPI - or headline inflation - is so benign is a hard sell to the wider community.
‘‘I’m not so sure that people go around with the trimmed mean and weighted median in the back of their mind. It’s CPI inflation,’’ Mr Roberts said.
But he also thought it odd that this week’s minutes largely concentrated on the effects of the cash rate, when previous comments by the RBA suggested it was outright borrowing rates that were more of a concern to the wider economy.
‘‘If anything it smacks to me that inside the RBA board there may be a little bit of dispute now between those who are more cautious and those who need a bit of controlling to go along with some rate increases.’’
‘‘Maybe the language is more aimed at their own folk than just the rest of us.’’
A key word - ‘‘imprudent’’ - in the minutes got money markets further tinkering with the idea of a larger 50 basis point increase in the cash rate at the next meeting on Melbourne Cup Day.
The minutes said that while downside risks to the domestic economy could not be ruled out, they had ‘‘diminished significantly’’.
‘‘This meant that the balance of risks was now such that the current very expansionary setting of policy was no longer necessary, and possibly imprudent,’’ the minutes said.
It was enough to get those economists who had expected the RBA to sit on its hands at the next meeting to join the overwhelming belief that the central bank will raise the cash rate for a second consecutive month.
It also raised the prospect of a 50 basis point increase, although the last time the central bank tightened monetary policy by this magnitude was at a meeting in February 2000.
Macquarie Research economist Ben Dinte expects next week’s inflation readings will settle the debate, and is leaning to a 25 basis point increase, rather than a larger hike.
‘‘This is consistent with policymakers taking their foot off the accelerator, rather than slamming on the brakes.’’
AAP
