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Inflation likely ended 2020 still subdued

The rate of inflation is expected to have remained extremely benign during the final three months of 2020, suggesting the Reserve Bank will have no need to adjust its interest rate outlook any time soon.

The December quarter consumer price index is released on Wednesday, the day after the Australia Day holiday which will see local financial markets closed.

Economists’ forecasts centre on a 0.7 per cent quarterly rise in the CPI, which will also keep the annual rate at 0.7 per cent, well below the Reserve Bank’s two to three per cent inflation target band.

Underlying measures of inflation, that are more sensitive to interest-rate policy and which smooth out wild price swings, are expected to average a subdued 0.4 per cent for the quarter and 1.1 per cent for the year.

The impact of the coronavirus pandemic on prices has resulted in some extreme quarterly movements in the CPI in the past nine months.

The CPI in the June quarter fell by a record 1.9 per cent, largely as a result of weak oil prices and the federal government’s scheme to make child care free in the face of the pandemic.

It sprang back by 1.6 per cent in the September quarter as the free child care scheme ended.

The effects of coronavirus on inflation are subsiding, the Australian Bureau of Statistics said earlier this month in preparing the groundwork for its latest CPI edition.

But it said a number of schemes introduced by the federal and state governments to support households hit by the economic impacts of coronavirus will put some downward pressure on the inflation figures in the December quarter.

These include the federal government’s $25,000 HomeBuilder grant, and similar $20,000 grants introduced by the West Australian and Tasmanian governments, which drove down the price of new houses for owner-occupiers.

The Reserve Bank has repeatedly said it will not be raising the cash rate and its other policy instruments from the record low 0.1 per cent until inflation is sustainably within the target band, which it does not see until 2023.

Wednesday will also the National Australia Bank monthly business survey, which provides an insight to conditions and confidence among firms, while the Reserve Bank will release its monthly credit demand figures on Friday.

Meanwhile, Australian shares will start the shortened trading week with a firmer bias after a mixed finish on Wall Street on Friday.

US shares paused for breath after their record-breaking run on expectations of stronger economic growth later this year.

The US benchmark S&P 500 index fell 0.3 per cent to 3841.47, coming off two straight days of all-time highs.

But it still notched up a 1.9 per cent gain for the week.

The Dow Jones Industrial Average dropped 0.6 per cent to 30,996.98 and the technology-based Nasdaq index inched up 0.1 per cent to 13,543.06.

Against this largely positive backdrop, Australian share futures rose 15 points or 0.2 per cent to 6748.

On Friday, S&P/ASX200 benchmark index ended 0.3 per cent lower at 6800.4 on Friday, but was still 1.3 per cent higher on the week.

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