And while the dollar has fallen in the past three months and petrol prices have jumped, it’s odds-on that the next measure of inflation and the trimmed mean will start with a 1. Half the total growth in prices over the past year was in housing-related charges such as electricity costs. Credit:Paul Jones That is low inflation by any measure. It shows the Coalition’s scare campaign against the carbon tax was just a scare campaign. And it sets no bar to the Reserve Bank board cutting interest rates early August if it believes the state of the economy warrants it. Most analysts think it does. In the six months to March, the economy grew at an annualised rate of 2.25 per cent, and output per head grew at an annualised rate of just 0.5 per cent. That is an economy clearly underperforming, and the data released since gives little reason to think it is growing faster now. Before the inflation figures came out, financial markets had priced in a 67 per cent chance of a rate cut next week. After the data appeared, some took fright, because analysts had forecast that underlying inflation would rise by 0.5 per cent, and, woe! the average of the two measures the Reserve relies on was 0.6 per cent.

The dollar bounced over 93 US cents briefly, once to bounce down again by half a cent when the preliminary figure for HSBC’s China Purchasing Managers’ Index was slightly lower than economists had forecast. Well, it gives the traders something to fill their day, but it doesn’t affect real life. In real life, the RBA’s two measures of underlying inflation are not equally reliable. The one which rose by more than expected (0.7 per cent) in the June quarter was the weighted median, which is very lumpy and prone to lean excessively either way, depending on the exact order of price rises for particular items. The Reserve has yet to disown it publicly, but it might as well. The trimmed mean measure of underlying inflation rose just 0.5 per cent over the quarter and 2.2 per cent over the year. That implies that inflation is still where we thought it was: squashed down by a weak economy in which firms are ultra-cautious about raising prices. Bear in mind that before the carbon tax came in, Treasury estimated that it would lift the CPI by 0.7 per cent, and underlying inflation by 0.4 per cent. If that’s right – and some analysts looking at the data think the tax’s impact was even less than that – then without the carbon tax, the CPI would have risen 1.7 per cent, and the trimmed mean by 1.8 per cent. There is no sign in these figures that the carbon tax has had any impact after the initial bounce last September.

Darwin (3.9 per cent) is the only capital city with inflation ouf control, primarily because of spiralling housing rents. Hobart (1.8 per cent) has the lowest inflation (its hydro power means the carbon tax had no impact). All the other capital cities had price rises of between 2.0 per cent (Brisbane) and 2.6 per cent (Sydney). Half the total growth in prices over the past year was in housing-related charges. Electricity prices rose 17.2 per cent, mostly due to the carbon tax, gas prices by 15.3 per cent, property rates by 5.8 per cent, rents by 3.4 per cent, and the non-interest costs of buying a new home by 3.8 per cent. Medical and hospital bills climbed 9.9 per cent, as the price of our increasing longevity and expensive medical technology, Federal government tax grabs pushed up cigarette prices by 9 per cent, insurance bills rose 7.5 per cent, and private school fees shot up another 5.7 per cent. Between them, these eight areas, although comprising less than 30 per cent of household spending, generated 80 per cent of Australia’s inflation in 2012-13. Federal and state taxes and poor regulation were largely responsible for most of them. The Bureau estimates that inflation in the market sector was just 1.5 per cent. They were partly offset by four sectors where we saw significant price falls in 2012-13, partly due to the high dollar. Petrol prices fell by 3.3 per cent over the year (so much for Tony Abbott’s predictions that petrol prices would soar under the carbon tax).

New car prices fell 3.4 per cent, the price of household appliances by 4.5 per cent, and computer prices, as the Bureau calculates them, by almost 9 per cent. There were also marginal falls in the prices of clothing and footwear, pharmaceuticals, and the price of recreational goods and services. Food prices rose just 1.1 per cent, and alcohol by 1.6 per cent. If the Reserve has any reason for concern looking ahead, it is that these falls or small rises are unlikely to be repeated. The impact of the lower dollar is now being felt at the petrol pump, and it will spread to other areas as the financial year wears on. Loading Against that, however, inflation is now running at low levels, domestic demand has stopped growing and wage growth has decelerated markedly. Away from the petrol pump, many firms will opt to absorb rising import costs rather than pass them on and risk losing business.

A rate cut Tuesday week should be a pretty safe bet. It would still leave Australian interest rates well above those in the rest of the West, but would probably give the currency markets a helpful nudge to sell the dollar down a bit more - as the Reserve would prefer.