Inflation has not grown this slowly since 1999 but economists are split over whether it means the Reserve Bank will cut interest rates next week.
New data from the Bureau of Statistics shows headline annual inflation is now growing at just 1%.
The weak figure was partly caused by price falls in the June quarter for domestic holiday travel and accommodation (–3.7%), motor vehicles (–1.3%) and telecommunication equipment and services (–1.5%).
But, in the past 12 months, clothing prices have fallen (-0.2%), while rents (+0.7%) and recreation and education costs (+0.8%) have barely grown.
Economists say Australia is importing much of its deflationary pressure, helping to keep prices subdued. They say exceptionally low oil prices from the past year have only just begun to rise.
Record low wages growth, slowing growth in rents and strong discounting in major supermarkets have contributed significantly to weak inflation, despite Australia’s better than expected gross domestic product growth of 3.1% and its lower-than-expected unemployment rate of 5.7%.
But economists are divided over whether the weak inflation figure means the RBA will cut interest rates to a record low 1.5% next month.
They say the underlying inflation rate is 1.5% – calculated by removing items with volatile price movements – which matches the RBA’s own forecast for the year to June quarter.
It is still below the RBA’s 2% to 3% target band – and it is expected to stay below the target band until mid-2018 – but it wasn’t a surprise, some say.
“Is inflation low enough to justify market pricing and economist’s expectations for an August rate cut? The answer is a qualified yes,” the Commonwealth Bank’s chief economist, Michael Blythe, wrote to clients.
“It is arguable that the domestic economy is in need of any additional stimulus at this point. There is a respectable line of argument that further rate cuts may not help. And that cuts may just add fuel to the housing market.”
Private economist Saul Eslake told Guardian Australia: “Given that most of the incoming data on economic activity since their last meeting will have not altered their view of how economic growth is tracking, I would say on balance they’re now less likely to cut rates next week.”
The Reserve Bank meets next week to discuss interest rates and it will be the second-last meeting for its governor, Glenn Stevens.
Stevens has led the bank since September 2006 but he will be replaced by his deputy Philip Lowe in September.
