Australia joins deflation nations

Perth has had its deepest quarter of deflation since the 1991 ‘recession we had to have’, with prices falling 0.6 per cent in the three months to March, driven by cooling house prices and cheaper fuel.

The latest consumer price index data show prices fell in six of the eight capital cities, while the drop nationwide was 0.2 per cent, according to the Australian Bureau of Statistics.

That meant year on year inflation of just 1.3 per cent, well below the Reserve Bank of Australia’s target range, a result that no doubt contributed to a fall in the currency of 1.3 cents against the US dollar during trading today.

One Australian dollar is now buying 76.18 cents.

Only Darwin’s quarterly numbers were softer than Perth, with a fall of 0.9 per cent.

The last quarter of deflation in Perth was March 2009, during the fall out from the GFC, while there had been a 1 per cent fall in the three months to March 1991.

Just 14 quarters out of roughly 100 across the 25 year period registered falls in Perth's price level.

Image: Quarterly Perth CPI results for 10 years.

The bureau said the main contributors to the Perth fall were automotive fuel, which was 8.4 per cent lower, housing purchases by owner occupiers, down 2.2 per cent, and rents, which dropped 2.3 per cent.

Clothing and footwear prices fell by nearly 3.4 per cent in the three month period in Perth.

UBS economist Scott Haslem said the below-target inflation score would not be sufficient for an interest rate cut, although it did lower the hurdle for future cuts.

Mr Haslem said inflation was materially lower than expected, and only the second time in 15 years underlying inflation was below the Reserve Bank annual target.

CommSec chief economist Craig James said Australia had joined a number of developed economies worried about deflation, including the European Union.

“It is pretty clear that inflation is not a threat to the domestic economy, meaning that the Reserve Bank can comfortably keep interest rates at exceptionally low levels over the medium term,” he said.

“Domestic inflationary pressures remain well contained and given the slow growth in wages it is unlikely to result in a change to the domestic inflation landscape.

“While we don’t think there is a screaming need for interest rates to be cut on economic activity grounds, the low inflation result opens the door for the Reserve Bank to cut rates if they deem it is necessary.

“The question is whether the Reserve Bank believes that cutting interest rates will actually provide a boost to the economy given that interest rates are already at generational lows.”