The annual rate of inflation has eased to a seven-year low as the economic slowdown keeps a lid on price rises, a private-sector survey shows.

The inflation gauge calculated by TD Securities and the Melbourne Institute fell 0.3 per cent in May, following no change in April and a 0.1 per cent decline in March.

In the year to May the inflation gauge rose by 1.5 per cent – its lowest annual figure since its inception in mid-2002.

The Reserve Bank of Australia (RBA) aims to keep inflation between two and three per cent.

Major contributors to May’s result were price falls in rental accommodation, holidays and alcoholic drinks.

Offsetting the falls slightly were price rises in fruit and vegetables; books; newspapers and magazines; and household supplies.

TD Securities’ senior strategist Annette Beacher said inflation has become a non-event as the economy slides into recession.

“With the recession starting to bite, inflation has all but disappeared and there now seems to be a realistic threat of deflation, at least in the short term,” Ms Beacher said on Monday.

“Of some concern, there has been no net change in aggregate prices over the past eight months and price increases over the past year have averaged just 0.12 per cent per month.”

Ms Beacher said the easing in inflation should prompt the RBA to lower the official cash interest rate to provide further stimulus to the economy.

“The low inflation outcome and now genuine threat of deflation should be a timely reminder for the RBA board that interest rates are too high and rate cuts should be delivered,” she said.

“There is no doubt that further interest-rate cuts are necessary as the economy goes backwards, inflation threatens to turn to deflation and the unemployment rate skyrockets.”

The board of the RBA will hold its monthly meeting on Tuesday June 2. A survey of 20 economists shows they all expect the central bank to leave the overnight cash rate at three per cent, a 49-year low.

Professor Don Harding, of La Trobe University’s Department of Economics and Finance, said inflation was not currently a concern.

“Price pressure eased in May with prices rising in 25 expenditure groups and falling in 16 for a net balance of nine rises,” Professor Harding said.

“While this measure of price pressure remains stronger than headline inflation it is very encouraging and suggests that inflation is contained for now.”


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