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Saturday 18

August, 2018 4:51 AM



June quarter inflation softer than expected

June quarter inflation softer than expected

The Consumer Price Index, the main measure of inflation in Australia, rose by 0.4 per cent in the June quarter...

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25.07.2018 03:43 PM

Low inflation keeps the Reserve Bank sidelined
Consumer price index; Skilled job vacancies

Inflation: The Consumer Price Index, the main measure of inflation in Australia, rose by 0.4 per cent in the June quarter, below expectations for a lift of 0.5 per cent. In seasonally adjusted terms the CPI rose by 0.5 per cent. The annual rate of headline inflation lifted to 2.1 per cent in the June quarter from 1.9 per cent in the March quarter. But the seasonally adjusted annual growth rate lifted to 2.2 per cent (also from 1.9 per cent).

Underlying measures: The Reserve Bank monitors three measures to derive the underlying inflation rate. The trimmed mean rose by 0.5 per cent in the June quarter (1.9 per cent annual); the weighted median rose by 0.5 per cent (1.9 per cent annual) and the CPI less volatile items rose by 0.2 per cent (1.8 per cent annual). Overall, underlying inflation rose by 0.5 per cent in the quarter and by 1.9 per cent over the year. Market goods and services less volatile items was up by 0.2 per cent in the quarter to be up 1.1 per cent on the year.

Main changes: Automotive fuel prices rose by 6.9 per cent in the June quarter, followed by medical and hospital services (up by 3.1 per cent) and tobacco (up by 2.8 per cent). But domestic holiday travel and accommodation prices fell by 2.7 per cent, followed by motor vehicles (down by 2.0 per cent) and vegetables (down by 2.9 per cent).

Skilled job vacancies: The Internet Vacancy Index fell by 1.0 per cent in June after decreasing by a downwardly-revised 1.2 per cent (previously -0.9 per cent) in May. The index is 4.2 per cent higher than a year ago and is still at levels last seen 6 years ago.

What does it all mean?

The Reserve Bank is likely to be unmoved by today’s inflation report. Consumer prices remain well contained, reflecting lacklustre wages growth, and aggressive price discounting and competitive pressures from global ecommerce entrants into the retail sector. 

And Aussie businesses are playing their part keeping costs under control by supressing wages growth. The NAB business survey for the June quarter, released last week, highlighted that business prices tracked sideways. In fact the NAB said, “The range of both input and final price indicators (labour costs, purchase costs and final products prices) suggest little, if any significant price pressures. Retail prices growth also tracked sideways at a very low rate. Wholesale price inflation slowed in the quarter, suggesting some further downstream price weakness.”

That said, by generating higher sales and record profits, corporate Australia has supported strong jobs growth over the past 18 months. Non-mining business investment is strengthening and the miners are beginning to generate strong free cash flow, supporting future capital equipment and exploration spending. The broader pick-up in economic activity and emerging skills shortages in some industries (i.e. Science, technology, engineering, construction and mining) are expected to lead to eventual pay rises for workers, gradually lifting consumer prices.

The lift in imported (tradables) inflation was unsurprising. Fuel prices have lifted globally on the back of OPEC and Russian crude oil supply restraint. CommSec produces a weekly report detailing movements in Australia’s petrol prices. The national average Australian price of unleaded petrol has been near 3 year highs for much of this year.
In fact, the annual increase in petrol prices to June 30 was 24.8 per cent – the strongest growth rate in 9½ years. So the 6.9 per cent lift in petrol prices was always going to be a strong overall contributor to imported prices.

Where will the higher rate of inflation eventually come from? With oil prices likely to weaken after the OPECRussia Vienna accord to lift production, the severe drought afflicting large parts of Australia could be a source of inflation. Extremely dry weather conditions are already impacting winter crop and livestock production, as observed recently by agribusiness companies, Nufarm and Elders. The US Department of Agriculture has cut its Aussie wheat production estimate by 12 per cent to 22 million tonnes in 2018/19 – the lowest level in 11 years. And rising Indian tariffs and dry weather will likely halve Australia’s chickpea output to around 500,000 tons this year.

The Reserve Bank won’t be touching interest rates any time soon. The Board’s preferred underlying inflation rate remains low and it is still struggling to get anywhere near the mid-point of the Board’s 2-3 per cent target. Reserve Bank Governor Philip Lowe says he would like to see inflation at a 2.5 per cent annual rate with wage growth at 3.5 per cent, but there is still some spare capacity in the labour market.

The Reserve Bank expects underlying inflation to hold near 2 per cent for the next 18 months. The Bank will revisit these forecasts in the next quarterly Statement on Monetary Policy on August 10.

What do the figures show?

The Consumer Price Index, the main measure of inflation in Australia, rose by 0.4 per cent in the June quarter, below expectations for a lift of 0.5 per cent. In seasonally adjusted terms the CPI rose by 0.5 per cent. The annual rate of headline inflation lifted to 2.1 per cent in the June quarter from 1.9 per cent in the March quarter. But the seasonally adjusted annual growth rate lifted to 2.2 per cent (also from 1.9 per cent).

The Reserve Bank monitors three measures to derive the underlying inflation rate. The trimmed mean rose by 0.5 per cent in the June quarter (1.9 per cent annual); the weighted median rose by 0.5 per cent (1.9 per cent annual) and the CPI less volatile items rose by 0.2 per cent (1.8 per cent annual). Overall, underlying inflation rose by 0.5 per cent in the quarter and by 1.9 per cent over the year. Market goods and services less volatile items was up by 0.2 per cent in the quarter to be up 1.1 per cent on the year.

Most notable price rises: Automotive fuel prices rose by 6.9 per cent in the June quarter, followed by medical and hospital services (up by 3.1 per cent) and tobacco (up by 2.8 per cent).

Most notable price declines: Domestic holiday travel and accommodation prices fell by 2.7 per cent, followed by motor vehicles (down by 2.0 per cent) and vegetables (down by 2.9 per cent).

Prices of tradables rose by 0.5 per cent in the June quarter. According to the Bureau of Statistics: “The tradable goods component rose 0.4 per cent mainly due to automotive fuel (+6.9 per cent), audio, visual and computing media and services (+3.0 per cent), garments for women (+2.2 per cent), and glassware, tableware and household utensils (+3.5 per cent). The tradable services component rose 1.3 per cent due to international holiday travel and accommodation (+1.3 per cent) due to peak travel periods in Europe and America.”

Prices of non-tradables rose by 0.3 per cent in the June quarter. According to the Bureau of Statistics: “The nontradable goods component rose 0.7 per cent, mainly due to tobacco (+2.8 per cent), new dwelling purchases by owner occupiers (+0.8 per cent) and takeaway and fast foods (+0.8 per cent). The non-tradable services component rose 0.2 per cent, mainly due to medical and hospital services (+3.1 per cent) and child care (+1.0 per cent).”

Tradable goods are those items whose prices are largely determined on the world market. Non-tradable prices are more affected by domestic economic conditions.

Over the last twelve months, the tradables component rose by 0.3 per cent, while the non tradables component rose by 3.0 per cent.

Capital cities: Sydney +0.4 per cent in the quarter (annual +2.1 per cent); Melbourne +0.4 per cent (+2.5 per cent); Brisbane +0.4 per cent (+1.7 per cent); Adelaide +0.4 per cent (+2.7 per cent); Perth +0.2 per cent (+1.1 per cent); Hobart +0.4 per cent (+2.4 per cent); Darwin +0.4 per cent (+1.2 per cent); Canberra +0.4 per cent (+2.8 per cent).

Across the capital cities the largest contributors to price gains over the June quarter:

• Sydney – petrol (+8.3 per cent);

• Melbourne – petrol (+6.4 per cent);

• Brisbane – petrol (+7.4 per cent);

• Adelaide – petrol (+7.2 per cent);

• Perth – medical and hospital services (+5.1 per cent);

• Hobart – petrol (+5.0 per cent);

• Darwin – sports participation – school vouchers (+22.4 per cent);

• Canberra – petrol (+2.8 per cent).

Skilled Vacancies

The Department of Jobs and Small Business Internet Vacancy Index fell by 1.0 per cent in June after decreasing by a downwardly-revised 1.2 per cent (previously -0.9 per cent) in May. The index is 4.2 per cent higher than a year ago and is still at levels last seen 6 years ago.

Job vacancies decreased in seven of the eight occupational groups in June and remained steady for Machinery Operators and Drivers. The largest falls were recorded for Clerical and Administrative Workers (down by 1.5 per cent), Sales Workers (down by 1.1 per cent), Professionals (down by 1.0 per cent) and Labourers (down by 0.9 per cent).

Job vacancies decreased in five states and the two territories in June. The largest fall was recorded in New South Wales (down by 1.4 per cent), followed by Western Australia (down by 1.2 per cent) and the ACT (down by 0.9 per cent). The only increase was recorded in Tasmania (up by 0.2 per cent).

Why is the data important?

The Consumer Price Index (CPI) is regarded as Australia’s premier measure of inflation. The CPI is published quarterly and measures price changes for a ‘basket’ of goods and services that dominate expenditure of metropolitan households. The “All Groups” index is the main focus, but other inflation measures are also published such as so-called ‘underlying’ measures. These include measures that abstract from price changes in volatile price items such as fresh food and petrol.

The Reserve Bank aims to keep the headline inflation rate between 2-3 per cent over an economic cycle. If inflation is high and expected to rise, the Reserve Bank may elect to raise interest rates in order to constrain price pressures. Conversely, if inflation is low and expected to remain low, the Reserve Bank may elect to cut interest rates if it believes the growth pace of the economy is in need of strengthening.

The Department of Jobs & Small Business releases a monthly Internet Vacancy Index. The index is based on a count of online job advertisements newly lodged on three main job boards (SEEK, CareerOne and Australian JobSearch) during the month. The index is the only publicly available source of detailed data on online vacancies, including for around 350 occupations (at all skill levels), as well as for all states/territories and 37 regions.

What are the implications?

The Reserve Bank will be content. Inflation is broadly in-line with its forecasts. There is little need to tinker with its projections. Most of the heavy lifting in prices occurred due to rising fuel, tobacco excise and rising health insurance premiums.

Consumers continue to be the winners of retail deflation. Motor vehicles, men’s footwear and technology equipment prices continue to fall. Prices of most clothing and apparel items are near 30-year lows.

While inflation remains contained for now, the severe drought could have implications for prices. Poultry, seafood and bread prices are all lifting off a low base. More broadly, prices are still more likely to rise over the coming year, not fall. And a weaker Aussie dollar could be one of the factors adding some upside pressure to traded good prices.

The cost of new homes and rents are unlikely, however, to provide the same inflationary boost as previously.

Today’s skilled internet job vacancies are near 6-year highs, complementing other leading job indicators such as the ANZ job ads index, which is at 7-year highs. The tightening of the labour market should see eventual wage gains in high demand sectors, gradually boosting inflation.

CommSec expects official interest rates to remain stable until at least early 2019.

Published by Ryan Felsman, Senior Economist, CommSec
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