Australian inflation likely fell by record in second-quarter amid virus fight

SYDNEY (Reuters) - Australian inflation likely took its largest decline on record in the second quarter as the government made child care free to help families through the COVD-19 lock down and petrol prices tumbled, though much of that will reverse this quarter.

FILE PHOTO: Bourke Street mall, a normally busy shopping hub in Melbourne, is seen devoid of people after the city re-entered Stage 3 restrictions as part of efforts to curb a resurgence of the coronavirus disease (COVID-19), July 23, 2020. REUTERS/Sandra Sanders

Analysts polled by Reuters forecast the consumer price index (CPI) dived 2% in the June quarter, from the first, causing annual prices to drop 0.4% in the first negative reading since 1998. The data are due on Wednesday.

That would be a major setback for the Reserve Bank of Australia (RBA) which had spent years trying to get inflation back up into its 2-3% target band and had been making progress with a reading of 2.2% in the first quarter.

Neither is the outlook favourable given the economy is almost certainly in its first recession since the early 1990s.

“Inflation is likely to remain very subdued given elevated unemployment, weak housing rents and new dwellings costs which make up around 15% of the CPI basket, along with the disinflationary impetus from China’s factories,” said Tapas Strickland, at economist at NAB.

A negative reading will not, however, mean Australia is in deflation which is a general and sustained fall in the level of prices across the economy.

Rather this is a one-off caused in part by the government making child care free from early April to late June, which alone will take around 1.1 percentage points from CPI.

With that relief now ended, child care costs will rebound sharply this quarter.

Likewise, petrol dived in line with a slide in oil to less than zero, though again that has since rebounded.

As a result core measures of inflation that strip out the largest price moves should stay positive, with analysts predicting the trimmed mean will rose 0.1% in the quarter and 1.4% for the year.

Still, the RBA is concerned that a low reading could become baked in to future inflation expectations, lowering wage growth and making it harder to get prices back up.

It has already cut rates to a record low of 0.25% and took the exceptional step of pledging to keep rates down for years to come in the hope of avoiding a drift toward damaging deflation.

Reporting by Wayne Cole; Editing by Shri Navaratnam