In the groove inflation rate means RBA on hold

Wed, 23 Jul 2014  |  

It seems the markets and a gaggle of commentators are getting a little excited about the June quarter CPI which showed headline inflation at 3.0 per cent annual terms and the underlying inflation measure at 2.8 per cent. At face vale, both are near or at the top of the RBA 2 to 3 per cent target band and without any further analysis would suggest there is something of an inflation issue in the economy.

But when one bothers to dig into the numbers, it is clear that inflation is probably slowing and one-offs have been pushing those annual figures higher.

In six monthly annualised terms, the path for underlying inflation over the past two years has been:

H1 2014: 2.5%
H2 2013: 3.1%
H1 2013: 2.1%
H2 2012: 2.7%

There was a bit of a lift in the second half of 2013, which now appears to be a quirk, perhaps influenced by the AUD dipping through much of 2013 and adding to some import prices. Obviously that mini-spike will drop out over the next two quarters which suggests a gentle pull-back in the annual inflation rate is likely by year end.

The August RBA Board meeting is likely to rest easy on the inflation front, comfortable in the knowledge that underlying inflation remains around the mid-point of its target, plus or minus a tenth or two.

This means that interest rates will be on hold a little longer. It could well be the case that with inflation a neutral issue, other key indicators will determine when and which direction rates next move.

This is where the next few labour force releases are so critical. It would be hard to see the RBA remaining on hold if the unemployment rate rose to 6.25 per cent and wages growth remained anchored below 3 per cent in the near term.

The Australian dollar remains an issue for the RBA, especially with the resumption of the commodity price fall that is linked to a good but not great picture for the world economy. Not that a rate cut would drive the dollar lower, but it would help guard against the damage it is doing to the economy.

The fly in the jam jar is house prices. They still seem to be chugging along at a solid double digit growth pace and any move to cut interest rates may underpin a move towards a particularly uncomfortable rate of house price appreciation. Maybe non-monetary policy policies need to be considered to address this increasingly uncomfortable lift in house prices.

All of which comes back to the good news on inflation – it is not a concern in either direction at the moment. With the Australian dollar still high, wages growth still low, it is likely to remain a neutral issue for the remainder of 2014.

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Australia facing a housing glut

Thu, 29 Jan 2015

The following article was first published in The Adelaide Review at this link: 

For many years, one of the fundamental factors cited as a driver of Australia's persistently high and rising house prices has been a shortage of supply of new dwellings relative to strong growth in demand.

The story, which I think is correct, was that Australia had experienced an extended period of very rapid population growth driven by both natural increase and, more importantly, strong immigration inflows. This has driven ongoing demand for new houses, whether the additional Australians are buyers or renters, the new demand is there.

While this unrelenting source of demand has been unfolding, there has been a simultaneous under-building of new dwellings for a range of reasons, which for the purposes of this article are not all that important. Suffice to say, in the period from around 2005 to 2013, there were simply not enough new dwellings being built to match the growth in demand.

Inflation in free fall - RBA desperately needs to cut rates

Wed, 28 Jan 2015

With the December quarter inflation data out of the way, the only thing standing in the way of an interest rate cut at next week's RBA Board meeting is its own pig-headedness and its crazed obsession with Sydney house prices. 

The December quarter CPI confirmed a further marked fall in inflation – the headline rate fell to just 1.7 per cent, the lowest annual reading since March 2012, and the quarterly momentum pointing to yet lower inflation in the next quarter or two. It was below the market forecast. it is only the fifth time since 2000 (that's 56 quarters) that inflation has been below 2 per cent. The underlying measures were also soft, with the annual increase at just 2.2 per cent, well down on the 2.8 per cent recorded in the June quarter 2014 and spot on the market forecast. The annual underlying inflation rate is now just 0.4 percentage points from being at a new record low. In the last decade, the annual underlying inflation rate has been lower than the December quarter 2014 reading of 2.2 per cent on just two occasions.

Whichever way the CPI data are cut and diced, inflation is low.