Inflation is low and remains low

Thu, 27 Apr 2017  |  

This article first appeared on the Yahoo7 Finance website at this link: https://au.finance.yahoo.com/news/inflation-020818312.html 

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Inflation is low and remains low

Inflation edged up a little in the March quarter – from an annual rate of 1.5 per cent at the end of 2016, the headline rate rose to 2.1 per cent. The underlying rate of inflation, which the RBA trends to place more weight on when it comes to assessments of interest rate policy, was even more muted, lifting from 1.5 per cent to 1.8 per cent.

And recall, the RBA target range for inflation is between 2 and 3 per cent.

Annual underlying inflation has been at or below 2 per cent since late 2015, and has been below 2.5 per cent, the midpoint of the inflation target, since the end of 2014. That is a long time.

The data today confirm that inflation is low and remains low and in isolation, continues to give the RBA plenty of scope to further reduce interest rates. When the recent data on unemployment, building approvals, private sector business investment and wages growth are added to the mix, the case for an interest rate cut is strong.

“Strong”, that is, except for two items – the boom in house prices in Sydney and Melbourne is a thorn in the side of the RBA, and signs that the global economy is performing well is good news because it should provide a boost to the Australian economy if it is sustained for the next year or more.

Importantly, the inflation outlook remains skewed firmly to the low side. Even the RBA is forecasting inflation to stay around 2 per cent right through to the end of 2018 which if correct, means its interest rate policy bias is towards cutting interest rates especially if, or rather when, the heat in Sydney and Melbourne house prices starts to fade.

On that score, there is plenty to suggest housing is about to weaken. The extension of regulatory changes to lenders will crimp demand, particularly from investors. The pending supply deluge will also work to dampen prices, especially in the second half of 2017 and into 2018. Add to that, some bank-initiated hikes in mortgage interest rates and the stars are aligning for the housing market to hit the wall, at least in terms of price changes.

Already there are some signs of a cooling in housing. While there is a seasonal pattern to house prices, the recent Corelogic series points to prices edging lower in Sydney and topping out in Melbourne. Weakness over the next few months, while welcome, could be problematic if it goes too far or builds momentum.

Globally, inflation is well contained. This is important for the Australian economy which is closely linked to global economic trends. There was a clear lift in price pressures late 2016 and early 2017 largely on the back of the rising price of oil and other commodities but these have clearly reversed in the most recent data.

All of which suggests that Australia’s next inflation reading will be lower and with that, the pressure will remain on the RBA to cut interest rates. If this coincides with clear evidence of a weakening in house prices, the next interest rate cut could be delivered in August or September.

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The misplaced objective of the government of delivering a surplus, come hell or high water, has gone up in smoke

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What's ahead for the Australian economy and markets in 2020

Thu, 02 Jan 2020

What's ahead for the Australian economy and markets in 2020

Happy New Year!

2020 will be a year where Australia’s annual GDP will exceed $2 trillion, our population will get very close to 26 million people and we will clock up 29 years with no recession.

It is also a year where the economy will be a dominant issue for policy makers, will drive what happens to interest rates, will help drive investment returns and will feed into the well-being of the Australian community. 

2020 kicks off with relatively good news in terms of economic growth, even though the labour market is likely to remain weak, with wages growth struggling to lift and inflation remaining below the RBA’s 2 to 3 per cent target. The Reserve Bank may have one more interest rate cut in its kit bag, but by year end, the market is likely to price in interest rate increases, albeit modestly.

The ASX, which had a great 2019 is set to be flatten out, in part driven by the change in the interest rate outlook, but it should get a boost from better news on housing and household spending.

In terms of the specifics, I have broken down the 2020 outlook into a range of categories and given a broad explanation on the issues underpinning the themes outlined.

GDP Growth

It’s a positive outlook. A pick-up in GDP growth from the current 1.7 per cent annual rate is unfolding, with the only real issue is the extent of the acceleration.