Press Conference

Parliament House

28 October 2009

SUBJECTS: Consumer Price Index

TREASURER:

I just wanted to make a few remarks about the inflation figures today because the figures today show that inflation in Australia has moderated further as the full impacts of the global recession continue to wash through our economy. Annual headline inflation moderated to 1.3 per cent in the year through to the September quarter down from 1.5 per cent. Now this is the lowest annual headline rate in ten years. It means that annual headline inflation has now decreased from 5 per cent one year ago to 1.3 per cent currently.

Quarterly growth in the CPI of 1 per cent was largely driven by some unusually large increases in utility prices, charged by state energy providers. These increases were responsible for almost half of the quarterly increase in the CPI. So state utility increased prices were responsible for almost half of the quarterly increase in the CPI.

Underlying inflation also eased to 3.5 per cent over the year to the September quarter down from 3.9 per cent. So overall we're continuing to see an easing of inflationary pressures in the economy that is broadly based. That reflects the fact that our economy is operating well below capacity and, of course, as the Governor of the Reserve Bank has said on a number of occasions – it is hard to say there is too much growth in the economy.

Private business investment remains weak in the near term and unemployment is still expected to rise. And of course the flow through of recent falls in our terms of trade and a substantial reduction to hours worked will continue to weigh on domestic incomes for some period of time. And of course that's why both fiscal and monetary policy support is being gradually and carefully withdrawn – so as to support jobs until the recovery has taken hold.

And of course as you know fiscal stimulus has already peaked and is already tapering away. The gradual withdrawal of stimulus will subtract from growth through 2010 making room for an expansion in private activity. And of course as I've said before, the bulk of the stimulus that remains is, of course, in critical nation building infrastructure – investment in major highways, rail upgrades, ports, hospitals and schools. And as I've said before, that is short-term spending with long-term gain. This infrastructure investment will build future productive capacity – the key to ensuring strong growth with low inflation, into the future. This is the type of investment that Australia needs and it's central to providing a stronger platform for sustainable growth.

Over to you.

JOURNALIST:

A predecessor of yours once said – it was very similar to this – that he had inflation right where he wanted it, and then the Reserve Bank lifted interest rates. Do you think that inflation is right where you want it?

TREASURER:

Well, I'm not prone to making statements like my predecessor; I think you might have noticed that by now. I am somewhat more modest.

Now what we've seen here with these figures today is that there is still substantial spare capacity in our economy. That is very clear. What is also very clear – and the Reserve Bank and the Treasury have said on a number of occasions that they think that inflation remains subdued in the near term. And of course I referred before to the previous remarks of the Reserve Bank Governor, where he said that it was hard to say that there was too much growth in the economy. The point that I want to make – there is spare capacity and what we have to do is put in place a range of policies that ensure when we begin to grow more strongly, that we don't see a return to the capacity constraints that we've seen in the past.

But it's very important to drill down into this figure. Almost half the quarterly increase flows from increases in state utility prices – almost half. If you drill down into the housing section, 0.4 of the 1 per cent is exclusively state utilities. So when I said before in my introductory remarks that inflationary pressures were easing and that that easing was broadly based, you can see that if you look at what else is going on in the figures. There is a very strong impact here from what's going on in terms of utility pricing.

JOURNALIST:

So are you blaming the State Governments for this increase…

TREASURER:

I'm not blaming anyone, I'm pointing to what the figures say and the figures point fairly and squarely to a substantial increase in utility prices in some states of Australia that have impacted on this quarterly figure. When you look at the basket in total, that has had a very big impact – 0.4 per cent of 1 per cent.

JOURNALIST:

Is the point you're making that these utility prices wouldn't really be influenced by interest rates. That they're, if you like, outside what would usually…

TREASURER:

Well, I think it would be the case that those that observed would tend to look through the short-term impact of these matters, but nevertheless it is something that we have to be alert to. It is a factor out there. It's a factor every September. Every September these prices show through but the fact is this September they are bigger than they have been in the past. And in that sense it is a one-off which disguises a broad-based easing of inflationary pressures. But having said all that, the Government will always be alert to inflationary pressures in our economy, simply as we begin to grow, which is why we are so concerned with building capacity.

JOURNALIST:

Treasurer, these are substantially Labor states. Of course if interest rates go up on Melbourne Cup day, is everyone justified in blaming state Labor Governments (inaudible)

TREASURER:

Well, I don't think you can draw any of those conclusions at all. Let's just go through it logically, one by one. I don't speculate about what the Reserve Bank will do when they meet, they are independent. But the Governor has made this point emphatically, and that is that rates can't stay at 50 year emergency lows forever, and that as the economy recovers and begins to grow, then the monetary policy stimulus will be gradually wound back. That's what the Governor has said. And rates are still very low and monetary policy is still very expansionary. But to draw a direct linkage between a decision of the Reserve Bank next week and one element of this figure today, I think is a stretch. Nobody likes to see an increase in electricity prices and those authorities that have been responsible for that increase bear the responsibility for accounting for it to the people that they represent.

JOURNALIST:

Mr Swan, just looking at the economy more widely – you've been notoriously reluctant to be cheered by various encouraging economic figures. I'm just wondering at the moment how you're seeing things, and are you finally heading (inaudible) the end of those woods?

TREASURER:

Well, things are better now than they were some months ago. That is abundantly clear from a range of the data that has been coming forward. But even if you look into that data you see a couple of factors which are as relevant now as they were last time you would have asked me that question. And the first one is that the business investment outlook is still weak. Business confidence is much stronger, but the actual intention to invest is still weak.

Secondly, what you can see is that there is still, flowing through our economy, a dramatic cut in national income that flows from reduced commodity prices – a very big cut to national income delivered through that transmission vehicle in the first half of this year.

Thirdly, we can still see that unemployment will continue to rise. It won't necessarily reach the forecast levels of six months ago, but it will still continue to rise. So those three things combined mean that we still face, in the near-term, an outlook which has got spare capacity. And as the Reserve Bank Governor has said, you can't see a situation where there is too much growth about.

JOURNALIST:

The RBA has indicated that they don't think underlying inflation (inaudible) as much as they had forecast in August. I was wondering if it was more that the Government (inaudible) bear down on inflation itself.

TREASURER:

Well, I think that our most fundamental challenge here is the long-term one. It is building the capacity so that when growth returns to normal levels and when the global economy recovers, we maximise our opportunities by making sure that we've got the capacity to deliver the production, to deliver the prosperity which is not accompanied by higher levels of inflation. Thanks.