CPI fell for the first time since 1931: CommSec's Craig James

EXPERT OBSERVER

The last time consumer prices fell by 1.9 per cent over a quarter – that is, over a three month period – was in 1931.

Back then it was the ‘C series index’ rather than the ‘consumer price index’. Just like today, those times – back in the late 1920s and early 1930s – were remarkable, being the time of a global depression. But fortunately policymakers today have responded differently to back then, applying significant fiscal and monetary stimulus to limit the length and severity of the economic downturn.

So prices are tipped to rebound in the current quarter. The last thing anyone wants to see is deflation – a sustained period of falling prices – because that could see the current economic downturn being extended.

Prices fell sharply in the June quarter for a number of reasons – principally, low rents, subsidised child care, free preschool and lower petrol prices. The best guide to underlying prices is the ‘trimmed mean’. This measure shows prices down 0.1 per cent in the quarter to be up 1.2 per cent over the year. So low annual inflation, not deflation.

In the current quarter – the September quarter – consumer prices are expected to lift from the lows. The headline rate of inflation is tipped to lift 1.4 per cent, pushing the annual growth rate up to 0.4 per cent. The annual trimmed mean is expected near 1.4 per cent.

While deflation is not expected to take hold, there is no room for complacency. Consumers should be given every encouragement to keep spending. If consumers start holding off on purchases on the hope of cheaper prices, then we will have a problem – a problem that would require more fiscal and monetary stimulus being applied.

The Reserve Bank has a long-run series on inflation back to 1922. Data can be found here:

https://www.rba.gov.au/inflation/measures-cpi.html

What do the figures show?

Overall result: The Consumer Price Index – the main measure of inflation in Australia – fell by 1.9 per cent in the June quarter (consensus: -2.0 per cent). It was the biggest ever quarterly fall for the CPI (since 1948). The last time consumer prices fell as much (C series index) was in September quarter 1931. In seasonally adjusted terms the CPI fell by 2.0 per cent in the June quarter. The annual rate of headline eased from a 5½-year high of 2.2 per cent to -0.3 per cent – the lowest result since September quarter 1997.

Underlying measures: The Reserve Bank monitors three measures to derive the underlying inflation rate. The trimmed mean fell by 0.1 per cent in the June quarter (1.2 per cent annual); the weighted median rose by 0.1 per cent (1.3 per cent annual) and the CPI less volatile items fell by 1.3 per cent (0.4 per cent annual). Overall, underlying inflation was flat in the quarter and rose by around 1.25 per cent over the year. Market goods and services less volatile items rose by 0.3 per cent in the quarter to be up 2.0 per cent on the year.

Capital cities: Sydney -2.3 per cent in the quarter (annual -1.0 per cent); Melbourne -0.8 per cent (+0.3 per cent); Brisbane -2.2 per cent (-1.0 per cent); Adelaide -1.0 per cent (+0.8 per cent); Perth -1.2 per cent (+0.1 per cent); Hobart -1.4 per cent (+1.3 per cent); Darwin -2.5 per cent (-1.8 per cent); Canberra -2.3 per cent (-0.6 per cent).

Main Negative Contributors:

The most significant price falls in the June quarter were child care (-95.0 per cent), automotive fuel (-19.3 per cent), preschool and primary education (-16.2 per cent) and rents (-1.3 per cent).

Child care: The ABS reported, “A fall of 95.0 per cent in child care was the main contributor due to free child care during the quarter. Excluding the impact of child care, this group would have risen 2.3 per cent.”

Housing: The ABS said, “Rents recorded the first quarterly fall since the series commenced in 1972. Weak rental market conditions as a result of COVID-19 lockdown restrictions and rising vacancy rates saw rents fall in most capital cities in the June quarter.”

The 2.5 per cent “fall in electricity was mainly driven by utility rebates in some capital cities to support households from the impacts of COVID-19.”

Automotive fuel: The ABS said, the “19.3 per cent fall in automotive fuel (was) due to low global demand resulting from COVID-19 restrictions. Automotive fuel fell in April (-15.9 per cent), and rose in May (+0.9 per cent) and June (+9.2 per cent)”

Education: The ABS said, “A fall of 16.2 per cent in preschool and primary education was the main contributor driven by free before and after school care and free preschool for term 2 in NSW, Victoria and Queensland.”

Food: the ABS said, “Falls of 1.4 per cent in vegetables and 1.1 per cent in beef and veal partially offset the rise this quarter. Improved weather conditions saw a range of fresh produce return to typical seasonal prices, while mince meat saw temporary discounts.”

Main Positive Contributors:

The most significant offsetting price falls June quarter were tobacco (+2.7 per cent), other non-durable household products (+4.5 per cent) and furniture (+3.8 per cent).

Furnishings, household equipment and services: the ABS said, “Rises of 3.8 per cent in furniture and 3.0 per cent in major household appliances partially offset the fall, due to strong demand for products such as home office furniture and fridges and freezers.”

Rises of 4.5 per cent in other non-durable household products and 6.2 per cent in cleaning and maintenance products were seen due to a reduction in specials and genuine price increases for toilet paper and cleaning products.

Recreation and culture: the ABS said, “A rise of 1.8 per cent in Audio, visual and computing equipment was due to strong demand for products such as TVs. This was the first quarterly rise in this series since 2015.”

Health: the ABS said, “falls of 0.5 per cent in pharmaceutical products and 0.2 per cent in medical and hospital services were the main contributors. The fall in pharmaceutical products was due to increases in the proportion of consumers who qualify for subsidies under the Pharmaceutical Benefits Scheme (PBS). The fall in medical and hospital services was due to a combination of increased bulk billing as well as a freeze on private health insurance premiums, which typically rise on 1 April each year.”

Food: the ABS said, “Rises of 0.8 per cent in take-away and fast foods, 3.8 per cent in fish and other seafood, 2.0 per cent in water, soft drinks and juices, and 6.1 per cent in other cereal products, were the main contributors this quarter. High demand saw a reduction in specials and genuine price increases on a range of long-life products such as canned tuna and canned meat, rice and pasta.” 

Prices of tradables: The tradables component of the ‘All groups CPI’ fell by 1.3 per cent in the June quarter to be down 0.5 per cent over the year.

Tradable goods component fell 1.3 per cent mainly due to automotive fuel (-19.3 per cent).

Tradable services component fell 1.9 per cent due to international holiday travel and accommodation (-2.0 per cent).

Prices of non-tradables: The non-tradables component of the ‘All groups CPI’ fell by 2.3 per cent in the June quarter to be down 0.2 per cent over the year.

Non-tradable goods component rose 0.2 per cent, due to tobacco products (+2.7 per cent).

Non-tradable services component fell 3.6 per cent, due to child care (-95.0 per cent).

In seasonally adjusted terms, the tradables component of the ‘All groups CPI’ fell 1.3 per cent and the non-tradables component fell 2.2 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.

What are the implications for interest rates and investors?

The Reserve Bank sets interest rates with a view of keeping inflation between 2-3 per cent over an economic cycle. Inflation is well below the lower bound of the range at present. And the expectation is that inflation will remain contained for some time. As a result, interest rates will spend an extended period at generational lows.

Super-low rates is a great result for borrowers. But it represents on-going challenges for savers. The added complication that listed companies are expected to slash dividends when they report over the next month.

Businesses that want an inflation guide for setting selling prices or rents are best advised to use the ‘trimmed mean’. The Reserve Bank expects annual trimmed inflation to be 1.25-1.50 per cent through to mid-2022.

Does it feel like deflation? Does it feel like the biggest quarterly fall in prices in 89 years? If you were outfitting your home office with furniture and computers, probably not. If you are renting, with children in child care, and paid electricity bills and health insurance premiums in the past quarter, then you probably noticed a big drop in outlays. Similarly if you drive a fair bit – petrol prices slumped in the quarter.

But apart from Victoria, expect more ‘normal’ growth of consumer prices in the months ahead. Petrol prices have certainly lifted and the period of free child care has come to an end.

The inflation measure ‘market goods and services, excluding volatile items’, rose 0.3 per cent in the quarter and 2 per cent over the year. This measure gives a better sense of ‘normal’.

CRAIG JAMES is the Chief Economist at CommSec