Inflation is a reasonable measure of country’s economic vigor. Lower inflation rate means that prices of goods in the market are stable and affects interest and exchange rates in a good manner. This is essential in the economy as stable rates normally produce stable prices, which provides more convenient platform for trading and doing business domestically and internationally.
Inflation rate in Australia has remained relatively stable throughout the years. In the first quarter of this year, the core prices index has finally reached the central bank’s target band. What does this tell about the Australian economy?
Inflation rate in Australia for the first quarter this year has climbed by 0.5% to settle at an annualized rate of 2.1%. Apparently, it was below the economists’ expectations of 0.6% jump. But compare to the previous quarter, it was stronger as it was only standing at 1.5% last year.
Importantly, this current 2.1% inflation rate crosses the target band of Reserve Bank of Australia of 2%-3%. It is the highest rate since the third quarter of 2014, three years ago when the country kept its key inflation at very low level.
With the inflation rate in Australia finally setting its foot on the central bank’s target, markets will surely react with this surprising upsurge.
Last year, when the RBA announced its new target of 2%-3%, the Australian dollar slipped down to 71.96 cents per US dollar from 72.15 cents US dollar. Some economists had called the governor to trim down the rate given that low inflation prevailed around the world. But the central bank’s highest official stressed that it is the best monetary policy framework, pointing out that economic growth is proceeding and a bit stronger inflation would be good.
It was the desired rate of the reserve bank. Now that it falls between the desired level, Australia may be heading towards it aim of financial stability and achieving medium term-price stability.