The latest inflation figures revealed that the era of abnormally low inflation growth appears set to continue well into this year, as “Black Friday” retail sales helped keep inflation growth below both market expectations and the Reserve Bank’s target range of 2% to 3%.
Over the past couple months, rather oddly, the market had moved towards pricing in an interest rate rise for later this year.
While the employment news has been good, little else suggests the economy is in need of slowing. Yet, whereas at the start of December last year the market was suggesting little more than a 50:50 chance of a rate rise by October, now the market is fully in pricing in a rise to 1.75% by November, and another rise to 2% by the middle of next year:
As I have noted in the past, the financial markets have been much more eager to see a rate rise coming than the Reserve Bank has been to indicate such a rise is actually about to occur. And the latest inflation figures do little to suggest a rise is coming.
In the December quarter, the ABS estimates that prices across the nation rose by 0.6%, and annually just 1.9% – making it the fourth calendar year in a row for inflation to grow by an amount below the lower bound of the RBA’s inflation target of 2% to 3%.
It was below expectations, with Westpac’s Justin Smirk suggesting the fact that clothing and footwear prices fell during a period when they normally rise means the expansion of the “the Black Friday sales” at the end of November “appear to be having an impact here”.
The RBA’s underlying inflation measure, “the trimmed mean” rose by just 1.8% – making it two full years since that measure has been within the RBA’s target:
And when you consider that the biggest price rise over the past year was again tobacco (15.2%) which is driven overwhelmingly by government excise increases, the actual rate of inflation growth for most people is even lower than the very low CPI rate.
If we excluded tobacco and alcoholic beverages, then inflation would have risen just 1.5% in 2017:
But once again however this overall figure does hide the cost of living issues. Most of the biggest prices rises were for essential items such as health, housing (including rents and utilities) and transport.
The figures also point to the greatly different stresses felt by households across the nation.
While price on average across Australia rose 1.9% in 2017, in Sydney, Melbourne and Canberra prices rose 2.2%, in Adelaide 2.3% and in Hobart 2.1%. On the other side of nation Perth (0.8%) and Darwin (1%) residents saw prices rise by much less than the national average (Brisbane at 1.9% was right on the average):
A big reason for the difference was housing costs. Rents rose 2.3% in Sydney, whereas they fell 7.1% in Perth as the effect of the end of the mining boom continues to hit. Similarly Melbourne, with 4.3%, had the strongest rise in the prise of new homes purchased by owner-occupiers, while the price of such homes fell last year in Perth.
The big difference though was the price rises of electricity and gas.
Adelaide, with 24.4%, saw easily the biggest increase in electricity prices, followed by Sydney with 16.4%, whereas in Perth they rose 9.7%.
Canberra led the way with gas price rises – up a massive 17.8%, more than double the next biggest rise of Melbourne with 8.5%, and miles away from the lowly 2.1% gas price rise in Perth – highlighting how the impact of the new LNG gas exports from Queensland only affects gas prices on the east coast:
Petrol price rises were a bit more uniform, and all capital cities saw a big jump in prices in the last three months of 2017 – in most cases, that three-month rise accounted for almost all of the petrol price rises last year:
The rise in petrol prices, coming off the back of a rise in oil prices, meant that the price of all tradable goods and services rose 0.5%, almost undoing the price falls of such items in the first nine months of the year. The price of non-tradable goods – such as rents, education, health and electricity rose 3.1% – higher than has been the case for the past four years, but still at a level that would provoke little excitement from the RBA:
This low level of inflation growth will inevitably lead to a continuation of the low wages growth. For while there has been an increase in inflation expectation in the past few months, they remain well below the long-term average:
And should the rise in prices be driven mostly by essentials such as utility prices, rents, health and education as has been the case for some years now, this lack of a growth in wage rises will also mean that households will continue to feel the effects of cost of living rises, even as overall inflation remains historically low.