Wednesday, 25 October 217 No Smoking Gun Despite Energy Price Spike It was another flaccid set of inflation numbers in the September quarter. Annual growth in headline inflation edged lower to 1.8% and the underlying annual growth rate was steady at 1.9%. Crucially, both outcomes remain below the Reserve Bank s 2-3% per annum target band. Utility prices spiked in the September quarter. Utility prices jumped 6.8% in the September quarter nationally, led by electricity prices, which rose 8.9%. Gas prices lifted 5.2%. In some capital cities, where the energy situation is more dire, the spike was far greater. Electricity prices in Adelaide grew 21.3% and were also running at a double-digit pace in Sydney and Canberra. Outside of energy prices, there was little sign of inflationary pressures building. The weaker currency is helping to clip the prices of imported goods and services. Indeed, tradables inflation fell by.3% in the quarter and by.9% on a year ago. Inflation failed to provide financial markets with a smoking gun. Markets are almost fully priced for the Reserve Bank to start a rate-hike cycle next year. Today s data did little to change this pricing, but it also did little to ensure this expectation will come to fruition. We expect inflation and wages growth to grind higher over time, but we do not expect the RBA to favour a rate hike as soon as next year. The unemployment rate is edging lower, but there is still spare capacity in the labour market. Additionally, the consumer remains fragile, suggesting the margin squeeze facing retailers is likely to continue, weighing on some categories of consumer prices. 6 2 Electricity Prices 5 Headline CPI Underlying CPI 3 RBA 2-3% pa Target Band 1 2 1 Mar-3 Mar-6 Mar-9 Mar-12 Mar-15 Mar-18-1 Mar-2 Mar-5 Mar-8 Mar-11 Mar-1 Mar-17 1
It was another flaccid set of inflation numbers in the September quarter. Headline consumer prices rose just.6% in the quarter, below consensus expectations and our own forecast that rested on an increase of.8%. The annual rate of headline inflation stepped down from 1.9% in the June quarter to 1.8% in the September quarter. The average of the Reserve Bank s two preferred underlying inflation measures, the trimmed mean and weighted median, rose.35% in the quarter. Additionally, the annual growth rate was steady at 1.9%. Both the headline and underlying rates of inflation continue to sit below the Reserve Bank s 2-3% per annum target band. The headline inflation rate has sat under this band for two consecutive quarters while the underlying inflation rate has stayed below the band for two years. Clearly, inflation pressures overall remain subdued in Australia. It is a trend that is not unique to Australia. Many other major economies around the world are also experiencing weak inflation. For now, some policymakers, like those in the United States, are looking through weak inflation outcomes. But the longer inflation remains subdued, the more it will worry policymakers. Inflation that is too low (or too high) is a headache for policymakers. The Reserve Bank seeks to keep inflation in a 2-3% per annum band over the medium term. Possible explanations for weak inflation lie with weak wages growth, the ageing population and technological advances. Indeed, the march of digital innovation might mean the hand of employers has been strengthened, resulting in weaker wage bargaining powers for employees. Soft wages growth goes hand in hand with weak inflation growth. CPI Groups Analysis The well-publicised surge in electricity prices was a key upward driver of September s consumer prices outcome. Utility prices surged 6.8% in the September quarter; electricity prices jumping 8.9% and gas & other household fuels rising by 5.2%. All three prices in the quarter grew at their fastest pace in five years. In terms of the contribution of utilities to the quarterly growth rate, it added a large.33 percentage points. Electricity alone added.25 percentage points. The increase in electricity prices was most evident in Adelaide, where supply constraints in energy have been greatest. Adelaide electricity prices rose 21.3% in the quarter, the fastest increase since early 23. Among other capital cities, there were substantial increases in electricity prices in Sydney (15.1%) and followed by Canberra (1.6%), Perth (9.7%) and Brisbane (3.6%). Electricity price increases were less evident in Melbourne (.3%) over the September quarter, although prices were still 8.6% higher in the year. There were other seasonal increases that boosted CPI in the quarter, which typically occur in the September quarter. These included prices for insurance (1.9%), international holiday travel & accommodation (.1%) and child care (2.2%). Working in the other direction, there was a large decline in vegetable prices (-1.9%) in the quarter, which reflected more favourable growing conditions. Petrol prices are the other key component which tends to impact significantly on headline inflation, but they fell just 2.3% in the quarter. The fall reflects the weakness in world oil prices, despite efforts by the Organisation of Petroleum Exporting Countries (OPEC) to try to curb 2
production as a way of boosting prices. Tradables and Non-Tradables Inflation The Reserve Bank has flagged that it would prefer the Australian dollar to be weaker as a further appreciation of the Australian dollar would weigh on inflation and growth. The disinflationary impact of the currency s appreciation earlier year is evident in today s inflation data. Tradables inflation measures the prices of goods and services that are imported, and is influenced by movements in the Australian dollar. It fell by.3% in the September quarter, which represents the fourth consecutive quarterly decline. The biggest driver of the decline in tradables inflation was automotive fuel and fruit & vegetables. International holidays & travel provided some offset. On a year ago, tradables inflation is down.9%, which is the first decline in annual percentage terms in two years. On the other hand, non-tradables consumer prices jumped by 1.% in the September quarter. It was the biggest quarterly growth rate in 2½ years. The annual growth rate lifted to a near four-year high of 3.2% in the September quarter, from 2.7% in the June quarter. Inflation by State The impact of higher electricity prices was evident in the State breakdown. Consumer prices increased the most in Adelaide (1.1%), followed by Canberra (.9%) then Sydney (.7%), where the hikes in electricity prices were largest. Price pressures were mostly muted in other capital cities over the quarter, including Darwin (.6%), Perth (.5%), Melbourne (.5%), Brisbane (.%) and Hobart (.3%). In annual terms, inflation pressures remain muted across capital cities. Inflation in Melbourne (2.2%), Hobart (2.%) and Canberra (2.1%) are sitting towards the lower half of the RBA s 2 to 3% per annum target band. Meanwhile, inflation in all other capital cities including Sydney (1.9%), Brisbane (1.5%), Adelaide (1.8%), Perth (.8%) and Darwin (.6%) is sitting below the RBA s target band. The weakness in inflation in Perth and Darwin is continuing to reflect the impact of the mining investment downturn in Western Australia and the Northern Territory. 8 Non-Tradables or Domestic Inflation 8 3. 2.5 Inflation by Capital City (annual % Change, Q3 217) 2. 1.5 1. Tradables or Imported Inflation.5 - Mar-2 Mar-5 Mar-8 Mar-11 Mar-1 Mar-17 -. Syd Melb Bris Adel Perth Hob Dar Can Aust Outlook Inflation failed to provide financial markets with a smoking gun. Markets are almost fully priced for the Reserve Bank to start a rate-hike cycle next year, but today s inflation data did little to ensure 3
this expectation will come to fruition. Overnight indexed swap rates show that financial markets lengthened the chance of a rate hike slightly after the release of the inflation data. But markets are still close to fully priced (at 9% versus 95% yesterday). We expect inflation and wages growth to grind higher over time, but we do not expect the RBA to favour a rate hike as soon as next year. The unemployment rate is edging lower, but there is still spare capacity in the labour market. Additionally, the consumer remains fragile, suggesting the margin squeeze facing retailers is likely to continue, weighing on some categories of consumer prices. Janu Chan, Senior Economist Ph: 2-8253-898 & Besa Deda, Chief Economist Ph: 2-825-3251
Contact Listing Chief Economist Senior Economist Senior Economist Besa Deda Josephine Horton Janu Chan dedab@stgeorge.com.au hortonj@stgeorge.com.au chanj@stgeorge.com.au (2) 825 3251 (2) 8253 6696 (2) 8253 898 The information contained in this report ( the Information ) is provided for, and is only to be used by, persons in Australia. The information may not comply with the laws of another jurisdiction. The Information is general in nature and does not take into account the particular investment objectives or financial situation of any potential reader. It does not constitute, and should not be relied on as, financial or investment advice or recommendations (expressed or implied) and is not an invitation to take up securities or other financial products or services. No decision should be made on the basis of the Information without first seeking expert financial advice. For persons with whom St.George has a contract to supply Information, the supply of the Information is made under that contract and St.George s agreed terms of supply apply. St.George does not represent or guarantee that the Information is accurate or free from errors or omissions and St.George disclaims any duty of care in relation to the Information and liability for any reliance on investment decisions made using the Information. The Information is subject to change. Terms, conditions and any fees apply to St.George products and details are available. St.George or its officers, agents or employees (including persons involved in preparation of the Information) may have financial interests in the markets discussed in the Information. St.George owns copyright in the information unless otherwise indicated. The Information should not be reproduced, distributed, linked or transmitted without the written consent of St.George. Any unauthorised use or dissemination is prohibited. Neither St.George Bank - A Division of Westpac Banking Corporation ABN 33 7 57 11 AFSL 23371 ACL 23371, nor any of Westpac's subsidiaries or affiliates shall be liable for the message if altered, changed or falsified. 5