Aussie news - Inflation expectations dips in May

# AAP
# May 20, 2010

UNCERTAINTY about the Eurozone debt crisis and the possible flow through to the Australian economy lowered consumers expectations for inflation, a survey says.

The median expected inflation rate fell to 3.6 per cent in May, from 4.1 per cent the previous month, the Melbourne Institute Survey of Consumer Inflationary Expectations showed.

"The fall in inflation expectations probably reflects respondents' concerns that the unfolding of events in Europe might affect the domestic economy," Melbourne Institute research fellow Michael Chua said in a statement.

"Indeed, as shown in the latest Westpac-Melbourne Institute Consumer Sentiment Survey, the component indices reflecting economic conditions in next 12 months and next five years point to more respondents becoming less optimistic about future economic conditions."

Financial markets have weakened recently over concerns about the level of public debt in several Eurozone nations, including Greece, Spain, Portugal and Italy.

Yesterday, a Westpac-Melbourne Institute survey showed consumer confidence dropped seven per cent in May following the most recent rate rise by the Reserve Bank.

The central bank lifted the cash interest rate by a quarter of a percentage point to 4.5 per cent on May 4, its sixth such move since October last year.

"We expect that the most important factor causing such a large fall in the headline index was the rate hike," Westpac chief economist Bill Evans said.

The proportion of consumers expecting inflation to be within the Reserve Bank's 2 to 3 per cent band rose to 16.2 per cent in May, from 15.9 per cent in April, which was below the 12-month average of 16.9 per cent.

The central bank uses monetary policy, or interest rates, to keep inflation within its target band over the economic cycle.

Australia's headline inflation rate rose 0.9 per cent in the March quarter for an annual rate of 2.9 per cent, according to Australian Bureau of Statistics.