Isolated Westpac questions CPI calculation method

Westpac, the only major lender to go out on a limb by suggesting the RBA will start cutting rates this year, has questioned the manner in which the latest CPI figure was calculated.

The June quarter CPI figure came in above Westpac and other economists’ expectations at 0.9%.

Market expectations were for 0.7% quarterly rise.

In a note following the release of the CPI figure, Westpac warns that “both headline and core numbers are heavily influenced by another questionable upside surprise on the heavily weighted deposit and loan facilities sub-component”.

Westpac had expected a fall in this sub-component of 0.3%.

Instead it rose another 2.1% in the June quarter to be up 5.4% for the year.

This followed a 4.6% spike in the March quarter that Westpac says “appeared to be a lagged impact from mortgage interest rate changes in late 2010 but looked overly-big at the time”.

“This was the biggest upside surprise versus our own forecasts and alone contributed about 0.1% to the June headline result,” the bank says.

It goes on to say that it notes “with relief that the ABS plans to change this troublesome sub-component from the CPI from the September quarter – dropping the problematic 'indirect' estimate of costs for one based on 'direct' charges”.

Other upside quarterly surprises in June were seen for food (+1.4% versus 0.7% expected by Westpac), clothing and footwear (+2.5% versus an expected fall of 0.5%), household contents and services (+1.5% versus 0.6%) and communications (+0.4% versus an expected flat result).

These were partially offset by downside surprises on housing costs (0.4% versus Westpac expectations of 0.7%) and health (+2% versus 2.6% expected).

According to Westpac, the four forces at work in the June quarter CPI result are the surprise pick-up in discretionary items; the ongoing impact from food price pressures; clear moderation in pressures in housing costs and the issue around deposit & loan facilities.