Australian inflation data leaves door open to cash rate cut

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The Australian Bureau of Statistics’ hotly anticipated consumer price index (CPI) inflation data today revealed that a rate cut from the Reserve Bank of Australia remains a moderately strong possibility next week.

Quarterly inflation came in at 0.4%, which compares favourably to the 0.2% fall delivered in the March 2016 quarter. This shock fall is what triggered the cash rate cut last May. For the 12 months to the June 2016 quarter inflation was 1%, and is softening compared to the 1.3% level logged for the 12 months to the March 2016 quarter.

The RBA is mandated to keep inflation within a 2%-3% range for the economy over the medium term as this is considered the optimum range to preserve the value of money while stoking sustainable growth via investment.

Clearly with inflation running at just 1% for the most recent 12-month period there’s a strong argument that the central bank will move to cut rates next week. However, it may take a wait-and-see approach to keep some ammunition dry with the full effects of the May rate cut yet to flow through into the real economy.

The RBA is also on the record as wanting to avoid stoking runaway house prices in Sydney (although the horse may have bolted there), while the scenario of anaemic growth across the economy if inflation remains abnormally low is also one it wants to avoid.

Whether or not the RBA cuts rates next week is hard to know, but what remains almost certain is that cash rates in Australia and globally are set to remain abnormally low for the short to medium term. This super-low cash rate environment is inverting the economic orthodoxy around an investment world where bonds are now bought for capital gains and shares for income.

The yield hunt means defensive dividend shares like Sydney Airport Holdings Ltd (ASX: SYD) and Transurban Group (ASX: TCL) are getting bid up to abnormally high valuations, while bond yields globally fall into negative territory. If moderate inflation does ever return to the global economy then these richly valued dividend stocks are likely to come back to earth with a bump.

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Motley Fool contributor Tom Richardson has no position in any stocks mentioned.

You can find Tom on Twitter @tommyr345

The Motley Fool Australia has no position in any of the stocks mentioned.

You can find Tom on Twitter @tommyr345

We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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