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MNI POLICY: RBA Debelle's Tobacco Comment Imp For CPI Outlook

By Sophia Rodrigues
     SYDNEY (MNI) - The Reserve Bank of Australia expects the forces
contributing to recent low rate of inflation to abate but warned that there is
uncertainty about low much longer they will persist, Deputy Governor Guy Debelle
said Wednesday.
     Debelle was speaks on the topic "Low Inflation" at the Economic Society of
Australian business lunch in Brisbane.
     Below are the key observations we made from the speech:
     --Debelle suggested the cash rate is likely to be remain on hold for longer
because the RBA would like to be more confident that inflation will be sustained
at a rate consistent with the target. He spoke in detail about the forces
contributing to low inflation in recent years and while he said the RBA expects
these forces to dissipate, he also said there is uncertainty about how much
longer they will persist.
     --Perhaps the key comment from Debelle in the speech was on tobacco prices
which he noted have been the single largest contributor to headline inflation
for some time now. In Q2, higher tobacco prices contributed 0.6 percentage
points to y/y headline inflation. The high rate of tobacco inflation reflects
the introduction of a new indexation regime in December 2013, which was to see
the tobacco excise increase by 12.5% per year above average earnings. This
regime, which was originally legislated for four years, was subsequently
extended out to 2020, Debelle said. That raises a question on what happens to
headline CPI beyond 2020 when tobacco prices no longer contribute.
     --Debelle said utility prices is a significant uncertainty for the RBA's
inflation forecast. The RBA expects utility prices to decline in the coming
quarter, he said. "The recent decline in wholesale prices and an increase in
competition amongst energy retailers has seen a decline in market offer prices
in many states. Furthermore, many energy retailers have indicated that they will
not be changing their standing offer prices in the September quarter, while
others have indicated that they will be lowering their prices," Debelle said.
     --Debelle noted that CPI inflation has average 2.5% since the inflation
target was introduced but over the past three years it has average just 1.8%. In
recent quarters around 80% of the CPI basket had an inflation rate below the
inflation-targeting average, he said.
     --Retail competition is one of the uncertainties to the RBA's inflation
forecast, Debelle said. According to him, despite margins in the retail sector
having been driven down due to foreign entrants, they still might be attractive
as there are other entrants who are only just establishing their foothold. "Our
expectation is that these forces still have some way to run," he said.
     --Rent inflation has been a considerable drag on inflation and reduced CPI
by nearly 0.2 percentage points per annum in recent years. The RBA expects the
pace of rent inflation to increase gradually over the next couple of years. The
vacancy rate has declined over the last year, and newly advertised rent growth
has increased. However, it will take some time for the flow of new rents to
materially affect the stock of rents captured in the CPI, Debelle said.
     --Debelle said the RBA expects the cost of child care will fall in the
September quarter. However, there is considerable uncertainty around what the
magnitude of this decline will be and there is also uncertainty around whether
the changes will affect measured inflation in subsequent quarters, he said. 
"For example, child care inflation has historically increased in the March
quarter since this is when families have typically reached the caps on their
benefit payments. Under the new system, many families will no longer be limited
by these caps, which means that child care prices could also fall in the March
quarter next year," he said.
--MNI Sydney Bureau; tel: +61 2-9716-5467; email: sophia.rodrigues@marketnews.com
[TOPICS: MMLRB$,M$A$$$,M$L$$$,MT$$$$]

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