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October, 2018 9:57 AM



Cost of living index

Cost of living index

The Living Cost Index (LCI) of wage-earning households rose by 0.4 per cent, inline with the main measure of inflation, the Consumer Price Index, in the June quarter.

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01.08.2018 04:39 PM

Cost of living pressures the highest in 4 years
Living Cost Index; International aviation; China manufacturing data

Living Cost Index lifts: The Living Cost Index (LCI) of wage-earning households rose by 0.4 per cent, inline with the main measure of inflation, the Consumer Price Index, in the June quarter.

Annual Living Cost Index for wage earners jumps: The annual growth rate of the LCI for wage-earning households accelerated to 2.3 per cent in the June quarter, up from 2.0 per cent in the March quarter – the strongest rate of growth in four years. The LCI outpaced the annual rate of headline inflation, which lifted to 2.1 per cent in the June quarter from 1.9 per cent in the March quarter.

International air traffic lifts: International scheduled passenger traffic through Australian airports increased to 3.03 million in May from 2.87 million a year ago – an increase of 5.4 per cent.

China purchasing manager index: The Caixin Manufacturing Purchasing Managers’ Index (PMI) fell from 51.0 to 50.8 in July, in-line with market forecasts. Results above 50 points imply expanding activity. 

What does it all mean?

Cost of living pressures are growing for wage-earning Aussie households, pensioners and self-funded retirees.

As evidenced by the recent inflation report from the Bureau of Statistics, petrol prices, medical and hospital services, and alcohol/tobacco prices rose in the June quarter.

Household budgets are being stretched with the cost of living index for wage-earning households surpassing consumer prices, rising at the fastest annual growth rate in four years. Not ideal when wages growth is just 2.1 per cent.

Falling food and non-alcoholic beverages, communication, and recreation and culture prices provided some respite for households. And while clothing and footwear prices lifted, prices of women and men’s apparel is still around 30 year lows on the back of aggressive discounting by retailers and global e-commerce competition.

Tourists are flocking Down Under, taking advantage of the weakening Aussie dollar. International airline passengers travelling through Aussie airports are increasing. Chinese airline passengers rose by over 24 per cent over the year to May. There was also a significant lift for Japanese visitors, up by 10 per cent. The last time passenger numbers decreased on an annual basis was over seven years ago.

Tourist operators, travel agents, hoteliers, restaurants, theme parks, airports and airlines all generate significant income from tourism.

The Qantas Group accounted for 27.6 per cent of total passenger carriage in May 2018, up from 26.5 per cent a year ago.

What do the figures show? 
Living Cost Index

The Living Cost Index of wage-earning households rose by 0.4 per cent in the June quarter, in-line with the headline consumer price index. Annual living costs’ growth, however, accelerated to 2.3 per cent, up from 2.0 per cent in the March quarter – the strongest pace of growth in four years.

The Living Cost Index across household types rose across all categories during the June quarter:

The living costs of other government recipient households rose by 0.3 per cent;

Pensioner and beneficiary households (PBLCI) rose by 0.3 per cent and employee households rose by 0.4 per cent;

The living costs of self-funded retiree households rose by 0.4 per cent and age pensioner households rose by 0.2 per cent.

According to the Bureau of Statistics: “The living cost index for employee households rose 0.4 per cent in the June quarter 2018. The main contributor to the rise is transport (+1.6 per cent), driven by automotive fuel due to increases in world oil prices. Alcohol and tobacco (+1.5 per cent) also contributed to the rise, driven by tobacco. The rise in tobacco is due to the flow on effects of the federal excise tax increase effective 1 March 2018. Food and non-alcoholic beverages (-0.4 per cent) contributed the most significant partial offset this quarter, driven by vegetables and fruit due to the increased supply of seasonal varieties.”

For Age Pensioners: “The living cost index for age pensioner households rose 0.2 per cent in the June quarter 2018. The main contributor to the rise is transport (+2.2 per cent), driven by automotive fuel due to increases in world oil prices. Health (+1.0 per cent) also contributed to the rise, driven by medical and hospital services. The rise in medical and hospital services is due to the annual increase in private health insurance (PHI) premiums on 1 April, and at the same time, the decrease in the PHI rebate, which increases out-ofpocket expenses.”

For Self-Funded Retirees: “The living cost index for self-funded retiree households rose 0.4 per cent in the June quarter 2018. The main contributor to the rise is health (+2.0 per cent), driven by medical and hospital services. The rise is due to the annual increase in private health insurance (PHI) premiums on 1 April, and at the same time, the decrease in the PHI rebate, which increases out-of-pocket expenses. Transport (+1.5 per cent) also contributed to the rise, driven by automotive fuel due to increases in world oil prices.”

International air traffic

According to the Bureau of Infrastructure, Transport and Regional Economics (BITRE) international scheduled passenger traffic in May 2018 was 3.03 million compared to 2.87 million in May 2017 – an increase of 5.4 per cent.

Passenger traffic for the year ended May 2018 was 40.437 million, up by 5.1 per cent increase over the year.

Total seats made available on international scheduled operations to/from Australia during May 2018 were 4.27 million – an increase of 5.6 per cent over the year. Overall seat utilisation decreased from 73.6 per cent in May 2017 to 73.3 per cent in May 2018.

The Qantas group – Qantas Airways, Jetstar and Jetstar Asia accounted for 27.6 per cent of total passenger carriage in May 2018. The group’s share in May 2017 was 26.5 per cent.

The share of passenger traffic accounted for by Australian designated airlines has increased from 32.1 per cent in May 2017 to 33.6 per cent in May 2018.

Low Cost Carriers AirAsia X, Cebu Pacific Air, Indonesia AirAsia, Jetstar, Jetstar Asia and Scoot Tigerair accounted for 15.7 per cent of total international passenger traffic in May 2018. The Low Cost Carriers’ share in May 2017 was 17.8 per cent.

What is the importance of the economic data?

The Australian Bureau of Statistics releases the Selected Living Cost Indexes (SLCIs), Australia incorporates the Pensioner and Beneficiary Living Cost Index (PBLCI) and the Analytical Living Cost Indexes (ALCIs) each quarter. The ALCIs have been compiled and published by the ABS since June 2000 and were developed in recognition of the widespread interest in the extent to which the impact of price change varies across different groups of households in the Australian population.

The Bureau of Infrastructure, Transport and Regional Economics (BITRE) releases data on domestic and international aviation each month. The data is useful in tracking consumer spending and airline performance.

Caixin releases its Chinese purchasing manager indexes at the beginning of each month. China is Australia’s largest trading partner and changes in the Chinese economy have major implications for the Aussie economy.

What are the implications for interest rates and investors?

Cost of living pressures continue to pressure Aussie household budgets. Wage earners and pensioners are bearing the brunt of price increases for ‘grudge’ purchases such as fuel, transport and health. All this at a time when pay rises are elusive.

Fortunately, retail goods deflation is partially offsetting some of these never-ending cost increases.

Airlines and tourist operators are benefiting from strong international visitor demand on the back of a still-robust global economy and weakening Aussie dollar. But airfares are likely to rise on the back of lifting jet fuel costs.

Caixin and official manufacturing gauges suggest a gradual slowdown in China’s growth momentum in the manufacturing sector. But China’s steel industry PMI rose to 54.8 points yesterday, the highest level since August 2017, implying solid demand for high quality Aussie seaborne iron ore amid environmental curbs and a new policy package aimed at supporting growth.

CommSec expects interest rate stability until 2019.

Published by Ryan Felsman, Senior Economist, CommSec
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