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Why inflation figures matter for your mortgage

Why inflation figures matter for your mortgage
The latest inflation numbers are lower than expected, and the immediate fall in the dollar by half a US cent — within seconds of the CPI being released — are a tell-tale sign that an interest rate rise on Melbourne Cup Day is no longer a certainty.

Inflation is the one big number the Reserve Bank of Australia (RBA) looks at to establish whether or not the economy is in danger of becoming overcooked. It has come in at 0.7 percent for the September quarter for an annual rate of 2.8 percent — 0.1 percent lower than market economists forecast. The subdued household and small business sectors, combined with lower import prices because of the high dollar, are having an opposite effect on the economy to the booming mines and their export income.

The two numbers that are perhaps more important than the headline rate of inflation are the trimmed mean of the CPI (up 0.6 percent to 2.5 percent) and the weighted median (up 0.5 percent to 2.3 percent) both of which are well within the RBA's guidelines of 2 to 3 percent inflation.

The evidence suggests that the real pressure on inflation this year has been the price of educating your kids and the price of health. No wonder these were such important issues going into the federal election. These are also costs that families find it almost impossible to cut back on. The message should be there loud and clear to the government that their system: their passed-on costs are hurting the mortgage and business belts of Australia.

On the plus side, the message from the big supermarket chains that better growing seasons and strong competition have kept food price inflation well and truly under control. For the year, average food prices have risen by just 1.7 percent and for the quarter were down 0.5 percent. Petrol and transport costs have also been under control, thanks to low prices for fuel, and telecommunications costs are also lower thanks to strong competition and better bundled prices from the big players.

The irony of this inflation number is the RBA has warned the community that it expects interest rates to rise. Even this week RBA governor Glenn Stevens indicated that people should anticipate rate rises; that the strong terms of trade and ongoing pressure on wages must feed into inflation some time. The banks, of course, are itching to raise rates beyond where the RBA move rates. The question now is whether the banks are prepared to push rates — even if the RBA does nothing. It will be a brave executive who goes first with this mission.

But that high dollar is a handbrake on inflation, to be sure. And if you consider that the CPI is within the RBA's guidelines — and that employment remains strong — then the two key fundamental principles of the RBA's charter for interest rate setting remain fulfilled. In the face of an international economy that is still showing signs of stress, the RBA board will need to cite compelling reasons if it raises rates on Tuesday.

Posted by Ross Greenwood - Money - NineM on 27th October, 2010 | Comments | Trackbacks

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