Q4 CPI above expectations as dwelling prices surge: Westpac
EXPERT OBSERVER
The ABS reported a 0.9% lift in the December quarter CPI which was greater than Westpac’s (and the market median) forecast of 0.7%. At two decimal places the CPI lifted 0.86% with the annual pace lifting a touch from 0.7%yr to 0.9%yr.
The core measures were around expectations with the trimmed mean lifting 0.4%qtr (WBC forecast 0.3%/market median 0.4%) while the weighted median gained 0.5%. Excluding the imputed series had little impact on the core measures.
The CPI is still being influenced by government taxes and subsidies which have been pushing and pulling on the data. However, outside of dwelling prices we found little to suggests more broad based inflationary pressures.
The main surprise compared to our forecast was how the surge in housing demand lifting dwelling prices to swamp the benefit of the Home Builders Grants. In many capital cities developers were able to lift prices in excess of the value of the grants, even in Perth and Hobart were the Federal Grant ($25,000) was supplemented by state government grants ($20,000).
In our preview we had expected that the know rise in childcare would be offset by falling housing costs but rising underlying dwelling prices swamped the discounts. Prices fell in Sydney (-0.3%), Adelaide (-0.5%), Darwin (-2.3%) and Canberra (-0.5%) but lifted in Melbourne (0.9%), Brisbane (2.0%), Perth (2.2%) and Hobart (1.1%). The large rise in Perth and Hobart is somewhat very surprising given the lower level of house prices in those capital cities and the almost doubling of the size of the grants in those cities.
It is also worth noting that rents rose 0.1%, while modest it was stronger than the expected fall -0.3%. Electricity prices fell -7.5% due to a $600 in WA which saw electricity prices fall -66.7% in Perth.
There was the expected rise in two key components; the 33.7% lift in childcare and the 10.9% rise in tobacco prices.
The ABS informed us earlier of the magnitude of the rise in child care due to the ending of free child care in Victoria. Overall, household equipment and services rose 3.4% (WBC forecast 3.5%). Excluding child care this group would have fallen -0.7%.
Tobacco prices rise every December quarter due to the re-indexing of the excise to the CPI.
Unlike the NZ CPI it was harder to find any broader inflationary pressures from the COVID induced changes in demand. Holiday travel cost did rise bit more than expected but household contents were close to expectations while clothing fell more than expected.
However, dwelling prices are running well ahead of our expectations and even rents have turned positive. These factors can have a meaningful impact on estimates of core inflation, something we will be looking more deeply at for our monthly update.
Justin Smirk is an economist at Westpac.