Inflation numbers ease rate fear | Federal Election 2010

JUST when the Reserve Bank's board meeting next Tuesday looked set to add some spice to an otherwise excruciatingly dull election campaign, along came a bland set of inflation numbers.

Obviously this was a great outcome for borrowers who were worried they were about to be slugged with another interest rate rise next week, but it has done nothing for election ratings.

If it wasn't for the phantom cabinet leaker, there was a serious risk of the campaign sending voters into a deep sleep by voting day.

This week's release of the Treasury and Finance's budget update - as part of the Charter of Budget Honesty - came and went with no vote changing exposes, having been nullified by Treasurer Wayne Swan's own economic update just days earlier.

While there was some tinkering at the edges of budget deficits and surpluses to come in the Pre-election Economic and Fiscal Outlook, there was no changes to economic forecasts.

But there were plenty of warnings on the outlook.

On the one hand the economy is expected to grow between three and 3.75 per cent over the next two years, but the report outlined a series of threats to the global economy.

These included the European debt crisis, uncertainty over whether the US recovery will gain traction, whether China can successfully prevent its economy overheating and the difficulty of advanced economies managing their fiscal position in a fragile global environment.

On the other hand, such is the strength of the Australian economy, a fully employed workforce and a strong income boost from a rising terms of trade is expected to see demand "increasingly stretch" the economy.

This will place upside risks on the report's inflation forecast of 2.75 per cent over the next two years.

Still, for now, inflation looks as good as the Reserve Bank could have hoped for given these concerns in Treasury and Finance.

While the consumer price index (CPI) for the June quarter did poke above three per cent, the more crucial underlying measures of inflation dropped to their lowest level in three years to 2.7 per cent on average.

The fact that the annual CPI rate did rise to 3.1 per cent, it is unlikely to concern the central bank given that it aims to achieve an inflation rate of two to three per cent "on average, over the cycle".

Indeed, it was more or less what it predicted when it left the cash rate unchanged earlier this month.

But it is the underlying, or core, measures of inflation that it keeps a closer watch on as they smooth out volatile items and indicate whether price pressures are becoming embedded in the economy.

Both sides of politics made predictable responses to this latest inflation news.

Opposition treasury spokesman Joe Hockey pointed out that the three per cent-plus CPI highlighted the cost of living pressures voters are under, not least from the massive increases in utility prices.

Overall, utility prices were a massive 15.3 per cent higher than a year earlier, although they hadn't moved in the three months to end-June.

Likewise, Mr Swan was "encouraged" to see the trend in underlying inflation, although he said he was aware that households were still doing it tough.

He was probably relieved that this campaign wasn't, in all likelihood, going to marred with an interest rate rise, unlike his predecessor's, Peter Costello, 2007 campaign.

As it was, the inflation data came a day after a poll put the coalition way ahead as preferred economic manager and best at controlling inflation.

RBC Capital Markets senior economist Su-Lin Ong said this lower starting point for underlying inflation could see it stay within the Reserve Bank of Australia's (RBA) target band for the next 12 months, albeit in the upper half of the range.

Again this is what the central bank had predicted.

"This puts the RBA in a particularly enviable position," Ms Ong said.

"With growth around trend, inflation comfortably within target, and a still uncertain global backdrop, the RBA can easily sit on the sidelines for the next several months and assess domestic and international developments."

All of which means homeowners and borrowers alike can also sit back in all probability on Tuesday night, relieved they haven't got to find extra money to make their loan repayments, and tune into the election campaign.

Although they had better set their alarm clock for August 21, just in case.