It is hard to find signs of rising inflationary pulse: Westpac's Justin Smirk

It is hard to find signs of rising inflationary pulse: Westpac's Justin Smirk
It is hard to find signs of rising inflationary pulse: Westpac's Justin Smirk

EXPERT OBSERVER

It is hard to find signs of rising inflationary pulse

The September Quarter CPI printed 0.4%qtr, compared to the market median and Westpac’s forecast for 0.5%. At 2 decimal places the rise in the CPI was 0.44%qtr so a sound 0.4% but it was the third consecutive 0.4% print holding the six month annualised pace at 1.6%yr. With base effects, the annual rate has eased back to 1.9%yr compared to 2.1%yr in Q2, 1.9% in Q1 and 2017 Q4 and 1.8%yr in Q3. Inflation continues to bump along just at, or just under, the bottom of the RBA’s target band.

Following the December quarter 2017 CPI we argued that searching for inflation in the Australian economy has been a fruitless as Vladimir and Estragon’s wait for Godot. This has not changed as we are still waiting to see how long this record breaking performance can continue. There were some hints in the September suggesting this scenario has much longer to run.

The average of the core measures, which are seasonally adjusted and exclude extreme moves, rose 0.3%qtr meeting our expectations. In the quarter, the trimmed mean gained 0.37% while the weighted median lifted 0.28%. The annual pace of the average of the core measures printed 1.7%yr, a further deceleration from 1.7%yr in Q2 2018 and 2.0% in Q1.

Incorporating revisions, the six month annualised growth in core inflation is only 1.5%yr which is well below the bottom of the RBA target band and the slowest pace September 2016.

CPI

Components of the CPI broadly as expected but some interesting surprises in the finer details

Some standout in the quarter – on the positive side there was a bump from food (0.5%),and surprising rise for clothing & footwear (0.2% vs –0.3% expected), rising auto fuel (1.4%) and a larger than expected seasonal bump in holiday travel (3.3%). On the downside, the bump from tobacco was less than expected (just 1.8%) while health costs fell more than expected (–0.4%), car prices fell again (–0.1%) and the fall in household content & services was larger than expected (–1.2%) with a larger than expected 12% fall in child care. We had highlight child care as a clear risk to our forecasts.

The most interesting new bit of information in the survey was for housing expenditure. While housing costs overall rose as expected (0.4%) rents rose 0.2% (we thought they would be flat), dwelling prices rose just 0.1% (we thought 0.4%) while utilities rose 0.8% vs our –0.4% expected. Overall the mix on housing is softer than expected as there are a number of near term negative risks for both rents and dwelling purchase costs in NSW and Victoria. Given that rents and dwelling purchases are worth around 15% of the CPI their own this is significant for headline and inflation even more so for core where their weight is somewhat higher.

CPI

Tradables rose 0.8% in the September quarter. The tradable goods component rose 0.4% due to automotive fuel (1.4%), fruit (2.4%), furniture (1.9%), and vegetables (1.6%). The tradable services component rose 4.0% due to international holiday travel & accommodation (4.3%).

Non-tradables rose 0.3% in September quarter. The non-tradable goods component rose 0.5% due to tobacco (1.8%), beer (0.9%) and takeaway & fast foods (0.7%). The non-tradable services component rose 0.1% due to domestic holiday travel & accommodation (2.4%) and property rates & charges (2.3%).

Low inflation remains embedded in the economy

We have now two consecutive years where forecasters have over-estimated the CPI print. The average error since the December quarter 2016 is +0.14ppt. Core inflation came in below expectations (0.3%qtr vs 0.4%qtr expected) but there error on core inflation is more random and does not have a consistent bias. The average error on core since December 2016 is just 0.006ppt. So analysts are broadly getting the core inflation pulse corrected but are still underestimating the disinflationary pulse which has seen greater than usual discounting in some sectors \which are then trimmed out of the core measures.

There are some isolated inflationary pressures; rising petrol and tobacco prices are clear standout as well as embryonic indicators that disinflationary pulse in retail may be easing but the moderation in housing costs (rents and dwelling purchases in particular) are a significant offset. This is significant as this group weighting means it has a meaningful impact on the estimates of both inflation and core inflation. As such, with core inflation well below the bottom of the RBA’s target band we can find little to suggest any risk of a meaningful acceleration.

Our preliminary estimate for the 2018 Q3 CPI is 0.7%qtr which will see the annual pace lift a touch to 2.0%yr as the recent rise in petrol prices makes a larger contribution in the December quarter. We are also expecting a modest recovery in dwelling purchase prices. Under our current scenario, even with a modest lift in housing costs and rising fuel prices inflation, inflation is expected to be at, or just under, 2.0%yr all the way out to end 2019.

On a festive note the ABS reports that this is the 70th birthday of the CPI in it’s current form – the index has quarterly history that goes back to the September quarter 1948.

Justin Smirk is a Senior Economist at Westpac

It is hard to find signs of rising inflationary pulse

The September Quarter CPI printed 0.4%qtr, compared to the market median and Westpac’s forecast for 0.5%. At 2 decimal places the rise in the CPI was 0.44%qtr so a sound 0.4% but it was the third consecutive 0.4% print holding the six month annualised pace at 1.6%yr. With base effects, the annual rate has eased back to 1.9%yr compared to 2.1%yr in Q2, 1.9% in Q1 and 2017 Q4 and 1.8%yr in Q3. Inflation continues to bump along just at, or just under, the bottom of the RBA’s target band.

Following the December quarter 2017 CPI we argued that searching for inflation in the Australian economy has been a fruitless as Vladimir and Estragon’s wait for Godot. This has not changed as we are still waiting to see how long this record breaking performance can continue. There were some hints in the September suggesting this scenario has much longer to run.

The average of the core measures, which are seasonally adjusted and exclude extreme moves, rose 0.3%qtr meeting our expectations. In the quarter, the trimmed mean gained 0.37% while the weighted median lifted 0.28%. The annual pace of the average of the core measures printed 1.7%yr, a further deceleration from 1.7%yr in Q2 2018 and 2.0% in Q1.

Incorporating revisions, the six month annualised growth in core inflation is only 1.5%yr which is well below the bottom of the RBA target band and the slowest pace September 2016.

CPI

Components of the CPI broadly as expected but some interesting surprises in the finer details

Some standout in the quarter – on the positive side there was a bump from food (0.5%),and surprising rise for clothing & footwear (0.2% vs –0.3% expected), rising auto fuel (1.4%) and a larger than expected seasonal bump in holiday travel (3.3%). On the downside, the bump from tobacco was less than expected (just 1.8%) while health costs fell more than expected (–0.4%), car prices fell again (–0.1%) and the fall in household content & services was larger than expected (–1.2%) with a larger than expected 12% fall in child care. We had highlight child care as a clear risk to our forecasts.

The most interesting new bit of information in the survey was for housing expenditure. While housing costs overall rose as expected (0.4%) rents rose 0.2% (we thought they would be flat), dwelling prices rose just 0.1% (we thought 0.4%) while utilities rose 0.8% vs our –0.4% expected. Overall the mix on housing is softer than expected as there are a number of near term negative risks for both rents and dwelling purchase costs in NSW and Victoria. Given that rents and dwelling purchases are worth around 15% of the CPI their own this is significant for headline and inflation even more so for core where their weight is somewhat higher.

CPI

Tradables rose 0.8% in the September quarter. The tradable goods component rose 0.4% due to automotive fuel (1.4%), fruit (2.4%), furniture (1.9%), and vegetables (1.6%). The tradable services component rose 4.0% due to international holiday travel & accommodation (4.3%).

Non-tradables rose 0.3% in September quarter. The non-tradable goods component rose 0.5% due to tobacco (1.8%), beer (0.9%) and takeaway & fast foods (0.7%). The non-tradable services component rose 0.1% due to domestic holiday travel & accommodation (2.4%) and property rates & charges (2.3%).

Low inflation remains embedded in the economy

We have now two consecutive years where forecasters have over-estimated the CPI print. The average error since the December quarter 2016 is +0.14ppt. Core inflation came in below expectations (0.3%qtr vs 0.4%qtr expected) but there error on core inflation is more random and does not have a consistent bias. The average error on core since December 2016 is just 0.006ppt. So analysts are broadly getting the core inflation pulse corrected but are still underestimating the disinflationary pulse which has seen greater than usual discounting in some sectors \which are then trimmed out of the core measures.

There are some isolated inflationary pressures; rising petrol and tobacco prices are clear standout as well as embryonic indicators that disinflationary pulse in retail may be easing but the moderation in housing costs (rents and dwelling purchases in particular) are a significant offset. This is significant as this group weighting means it has a meaningful impact on the estimates of both inflation and core inflation. As such, with core inflation well below the bottom of the RBA’s target band we can find little to suggest any risk of a meaningful acceleration.

Our preliminary estimate for the 2018 Q3 CPI is 0.7%qtr which will see the annual pace lift a touch to 2.0%yr as the recent rise in petrol prices makes a larger contribution in the December quarter. We are also expecting a modest recovery in dwelling purchase prices. Under our current scenario, even with a modest lift in housing costs and rising fuel prices inflation, inflation is expected to be at, or just under, 2.0%yr all the way out to end 2019.

On a festive note the ABS reports that this is the 70th birthday of the CPI in it’s current for – the index has quarterly history that goes back to the September quarter 1948.

Tags: 
Westpac Inflation

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