New inflation calculation will weight rents more heavily

Rental payments will have a greater weight in the calculation of inflation from the third quarter of 2011, while the weighting of mortgage fees has been reduced, the ABS has said. 

Besides rents, household services, health services and education will also get a greater weighting in CPI calculations. 

“The increase in the CPI weight[ing of rent] was driven by increases in the size and quality of dwellings being rented, and a slight increase in the proportion of people renting,” says CBA economist James McIntyre.

“Larger homes equal more rent, and as more housing is ‘consumed’, the weight in the consumption basket has increased.

“Low rental vacancy rates in major capital cities, and weak building activity in response to recent increases in interest rates, are likely to see elevated rental increases over the next few years.

“The larger CPI weight will compound the challenge this trend pose for the RBA in achieving its inflation target,” he says.

Not so, say ANZ economists Katie Deans and Riki Polygenis, who expect the new weights will have limited impact on ANZ’s or the RBA’s inflation forecasts.

“On balance, the composition of items increasing/decreasing in weight may lead to some minor upward bias to both headline and underlying inflation.  But our preliminary estimate is that this impact will be less than 0.1% per annum,” they say.

The weightings of fuel, furniture and financial services have all been reduced.

“Households have responded to rises in petrol prices over the years by consuming relatively less petrol.  The weight for automotive fuel fell by 0.13 points.  But at 3.6% of the CPI basket automotive fuel remains a major influence,” McIntyre says.

The largest decline in CPI weight occurred in the insurance and financial services sector.

“Most of this fall was due to the removal of the indirect charges for deposit and loan facilities, which was a volatile and somewhat unpredictable element of the CPI,” says McIntyre.

The reduced weighting of loan fees will be welcomed by Westpac, which claimed following the release of June quarter data that inflation figures had been “heavily influenced by another questionable upside surprise on the heavily weighted deposit and loan facilities sub-component”.

Larry Schlesinger

Larry Schlesinger

Larry Schlesinger was a property writer at Property Observer

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