Inflation in Australia edged higher in Q4 2019, however core measures were still muted despite three interest rate cuts.

The consumer price index (CPI) increased 0.7% in the fourth quarter, surpassing forecasts of a 0.6% rise, fuelled by gains in domestic holidays, cigarettes, travel, fuel and fruit prices, Reuters reports.

The annual pace increased to 1.8%, remaining under the Reserve Bank of Australia’s (RBA) 2-3% target range. A key gauge of core inflation read 1.6%, indicating four consecutive years below the target.

This ongoing weakness was one of the reasons why the Reserve Bank of Australia slashed interest rates three times in 2019 to a record low of 1.75%, and the reason why markets continue to price in at least another cut.

The central bank is scheduled to hold its first policy meeting of 2020 next week, but isn’t likely to make another cut this soon due to the recent fall in unemployment. 

While the rate cuts up to now have revived home prices, consumers are still weighed by sluggish wage growth and rocketing debt levels.

The mood has been gloomier still with the weeks of bushfires, as well as the coronavirus outbreak, impacting Chinese tourism to Australia.

Certain price hikes were a result of drought and reduced supplies of meat, fruit and vegetables. As such, many economists believe the bushfires and the ongoing drought will continue to drive up prices over the next few months.

According to Ivan Colhoun, a senior economist at NAB, the bushfires could remove 0.4% off economic growth this quarter, while the coronavirus may cost A$1-2 billion in lost revenue for tourism. 

“There is little evidence of either tax cuts or interest rate reductions feeding into increased consumer spending,” stated Colhoun.

“We continue to see two further rate cuts this year and the possibility of quantitative easing if the unemployment rate deteriorates more quickly than we forecast.”

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