Craig James, Chief Economist at CommSec has just released his latest economic update.
It makes for informative reading as he discusses the latest data on inflation, consumer confidence, interest rates and what it all means if you’re interested in property investment.
Consumer price index; Consumer confidence
[sam id=36 codes=’true’]Inflation lifts:
The Consumer Price Index – the main measure of inflation in Australia – rose by 0.8 per cent in the December quarter, above expectations for a lift of around 0.4 per cent.
In seasonally adjusted terms the CPI rose by 0.9 per cent. The CPI stands 2.7 per cent higher than a year ago.
Underlying measures were higher:
The Reserve Bank monitors three measures to derive the underlying inflation rate.
The trimmed mean rose by 0.9 per cent in the December quarter (2.6 per cent annual); the weighted median rose by 0.9 per cent (2.6 per cent annual) and the CPI less volatile items rose by 0.6 per cent (2.6 per cent annual). Overall, underlying inflation rose by 0.8 per cent in the quarter and around 2.6 per cent over the year – lifting towards the higher end of the Reserve Bank’s target band.
Rate cuts are off the agenda:
The latest data closes the door on any further rate cuts. Financial markets see just a 3 per cent chance of a rate cut in February. The Aussie dollar lifted almost a cent to hold near US88.7 cents.
Consumer sentiment: The Westpac/Melbourne Institute index of consumer confidence fell by 1.7 per cent to a 6-month low of 103.3 points in January. A reading above 100 still represents an optimistic consumer outlook.
What does it all mean?
• At present inflation is not a threat to the economy, meaning that rates can stay at these exceptionally low levels over the near term.
However the medium term outlook for inflation has certainly shifted higher. The weaker Australian dollar played a part in lifting prices across a raft of imported goods, however prices rise were broad-based and included domestic price increase domestic holiday accommodation, fruit and vegetable price increases and also a lift in new dwelling purchases prices.
• Inflation rose by 0.8 per cent in the December quarter and when seasonal factors are taken into account, inflation rose by 0.9 per cent.
Interestingly and somewhat surprisingly it wasn’t just imported inflation that was the main driver over the quarter. Domestic price pressures also lifted with non-tradable goods and services lifting by 0.8 per cent in the quarter.
• The headline inflation measures clearly highlight the substantial lift in inflation and this time round the even more closely-watched underlying measures suggested that was very much the case.
Annualised underlying inflation has lifted towards the higher end of the Reserve Bank’s 2-3 per cent target band. The average of the three key underlying inflation measures stands at 2.6 per cent.
• Interestingly despite the falling Australian dollar, fuel prices fell by 1.1 per cent in the December quarter, largely due to pressure on global oil prices. If petrol prices were to lift over coming months this would feed through the economy in higher transportation costs and in turn price increases across an array of goods and services.
• Overall the latest result is likely to see the Reserve Bank shift from debating the merits of another rate cut to a more neutral stance. CommSec believes that interest rates are likely to remain on hold over the next six months. The Reserve Bank would be more comfortable that the falling Australian dollar would help rebalance the economy, providing a boost to exports. In turn it is still too early to discuss rate hikes particularly given the sluggishness of the labour market. It seems the path of least regret is to remain on the interest rate sidelines while talking down rates.
• No one could accuse Aussie consumers of irrational exuberance. Inflation, interest rates and the jobless rate all remain historically low, share markets and house prices have been healthy and the global economy is improving with downside risks diminishing, but consumers have apparently become more downbeat, with the latest confidence reading at a six month low.
• Confidence levels still remain in optimistic territory but it is pretty clear that there are a few things on consumer minds at present. Job losses being the primary concern. The survey was taken during January 13 to 18– a period which included when the December jobs data was released. And the 22,600 jobs lost in December coupled with headlines highlighting the weakest jobs growth in around two decades certainly weighed on consumer outlook. Interestingly the Unemployment Expectations Index survey increased by 0.7 per cent in January and followed the 4.3 per cent increase in December.
• No doubt the weaker Aussie dollar and sharply higher petrol prices have also conspired to make Aussie consumers feel less chipper. Still, it has to be noted that consumer sentiment was near holding 3-year highs a couple of months back, so sentiment is fluky at present.
What do the figures show?
Consumer Price Index
• The All Groups Consumer Price Index (CPI) rose by 0.9 per cent in seasonally adjusted terms in the December quarter. In original terms the CPI index rose by 0.8 per cent in the December quarter. The annual rate of inflation rose from 2.2 per cent in the September quarter to 2.7 per cent in the December quarter.
• Underlying measures of inflation were higher in the December quarter. The weighted median measure rose by 0.9 per cent in the quarter, with the annual rate holding at 2.6 per cent. The trimmed mean measure rose by 0.9 per cent in the quarter with the annual rate holding at 2.6 per cent.
• Prices of tradables rose by 0.7 per cent in the December quarter, with higher prices for fruit, vegetables and tobacco. The most significant offsetting rises in the tradable goods component were for automotive fuel. The tradables component rose by 1 per cent over the year to December.
• Prices of non-tradables rose by 0.8 per cent in the December quarter. Price increases were recorded for new dwelling purchase by owner–occupiers and domestic holiday travel and accommodation. The most significant offsetting fall was for gas & other household fuels and breakfast cereals. The annual rate of non-tradables inflation rose from 3.6 per cent to 3.7 per cent in the December quarter. Tradable goods are those items whose prices are largely determined on the world market. Non-tradable prices are more affected by domestic economic conditions.
• The Westpac/Melbourne Institute index of consumer confidence fell by 1.7 points (1.7 per cent) from 105.0 points in December to a six-month low of 103.3 in January. The index is still up 2.7 per cent over the year.
• The current conditions index fell by 1.1 per cent, while the expectations index fell by 2.0 per cent.
• All five of the components of the index fell in January:
The estimate of family finances compared with a year ago was down by 2.4 per cent;
The estimate of family finances over the next year was down by 2.5 per cent;
Economic conditions over the next 12 months was down by 0.5 per cent;
Economic conditions over the next 5 years was down by 3.2 per cent;
The measure on whether it was a good time to buy a major household item was down by 0.3 per cent.
Gender & demographics: Men (index reading of 105.7, down 3.0 per cent) are significantly less optimistic than Women (109.4, down 8.4 per cent). Young people (18-24 years) are less optimistic (index down 5.4 per cent to 104.4). Across the other demographics: 25-44 years (index 111.9, up 2.1 per cent); 45 years plus (index 105.3, up 4.2 per cent).
By home ownership status: Confidence amongst tenants rose by 5.9 per cent; confidence by those who own their homes rose by 5.5 per cent; while confidence levels by those paying off home loans was unchanged.
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.
• Westpac and the Melbourne Institute release the Index of Consumer Sentiment each month. According to Melbourne Institute: “The survey of consumer sentiment was first undertaken in 1973 and was conducted on a quarterly basis until 1976, a six-weekly basis from 1976 to 1986, and has been conducted monthly ever since.” Confident consumers may be more inclined to spend, especially on major items.
What are the implications?
• At present inflation is very much under control; however the medium term inflation outlook has lifted. And while the Reserve Bank would still be talking down rates, in an effort to keep a lid on the Australian dollar, it is unlikely to look at further interest rate cuts, particularly with the economy showing green shoots.
• Confidence has softened, although it still remains in optimistic territory. And it is likely that the focus will shift to how the labour market performs over the next few months. CommSec expects labour market conditions to improve over the medium term, as a lift in economic activity translates through to a pickup in employment.
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