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Second Consecutive Month of Decreased Inflation Eases Pressure on Reserve Bank of Australia

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According to a recent article by ABC News, the official measure of inflation has decreased for the second consecutive month, providing some relief for the Reserve Bank of Australia (RBA) ahead of its upcoming meeting.

The Australian Bureau of Statistics’ monthly consumer price index showed annual inflation of 6.8% over the year to February, down from 7.4% in January and a peak of 8.4% in December. This has led financial markets to price in a greater than 90% chance of rates staying on hold in April.

The ABS noted that the most significant contributors to the annual increase in prices were housing, food and non-alcoholic beverages, transport, and recreation and culture. However, the level of price increases in most of those categories had eased since the previous month. For example, the annual increase in the cost of building a new house was at its lowest level since February last year, while travel and accommodation price increases had eased from summer holiday highs. On the other hand, food saw stickier price increases, with prices for food and non-alcoholic beverages easing slightly from an annual rise of 8.2% in January to 8.0% in February.

The decrease in inflation has been driven by a moderate rise in unemployment and keeping wages in check, which is what the RBA has been aiming for. However, there are signs that the effect is somewhat larger and faster than either it or most private sector economists had anticipated, prompting many to now forecast the RBA will take a breather from raising rates when it meets next week.

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Not all economists agree that the RBA will pause rate hikes. Senior economist with ANZ Research, Catherine Birch, said the bank is still forecasting the RBA will deliver two more increases to the cash rate, meaning it would reach 4.1% in May. Ms Birch said, despite Tuesday’s data showing Australia had passed the peak of inflation, other economic indicators pointed to the need for another cash rate increase next week. She said inflation still remains too high, which would suggest further rate increases are warranted to bring it under control.

In the same ABC News report, the decrease in inflation has been a welcome relief for small business owners like Ray Christy, who runs a café in eastern Melbourne. Christy has been struggling with surging costs and has had to increase prices, which is affecting staffing levels. He believes that if he does not pass on the price rises to customers, his business would be broke within three months. While some economists believe that the RBA will pause rate hikes, others still think further rate increases are necessary to control inflation. Regardless of the outcome of the RBA’s meeting, it is clear that small businesses are still feeling the effects of rising costs and will need to continue to adapt to the changing economic landscape.

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