ep 170 | The trouble with non-tradables inflation

The Reserve Bank left the Official Cash Rate unchanged last week, and it's forecast track suggests there will be no respite for borrowers until next year, even though the economy is slowing more than expected, unemployment is rising more quickly and inflation has fallen to the lowest level in three years. The headline consumer price index increased at an annual rate of four per cent in the 12 months to the end of March, and the Reserve Bank expects it to end the year at 2.9 per cent. However, this encouraging outlook is tempered by the fact that most of the decline has been driven by falling international (or tradables) prices. In contrast, domestic or non-tradables inflation, is still too high to provide any relief. What is causing this high domestic inflation, and what needs to happen for it to fall?