Wednesday, July 23, 2008

Inflation - not so bad

Today's number was 1.5 per cent for the quarter, 4.5 per cent annual - which looks bad.

But as CommSec says:

"Strip out housing and financial services and the inflation result improves dramatically – down from 4.5 per cent to 3.3 per cent. And if you go further and take out petrol (another factor outside Reserve Bank influence), all of a sudden the inflation reading doesn’t look so bad after all."

Here's how it sees the outlook:

Today's Canberra Times inflation story is below the fold:

The ACT’s weakening economy has seen it defy the nation on inflation -
recording a slide in its annual rate at the same as Australia’s rate has

Only one other state – Tasmania – reported such a slide.

Australia’s annual rate of inflation jumped from 4.2 to 4.5 percent in the
June quarter – a rate even further above the Reserve Bank’s target band of 2
to 3 per cent.

The ACT’s rate fell from 4.6 to 4.4 per cent.

The Bureau of Statistics figures show that Canberra prices increased by only
1.2 per cent in the June quarter - a rate bettered only in Hobart.
Nationwide, prices climbed 1.5 per cent – the biggest quarterly jump since
the introduction of the Goods and Services Tax in 2000.

Leading national prices up were an 8.7 per cent jump in the price of petrol
in the quarter, a 3 per cent jump in the price of clothes, and a 2.1 per
cent jump in the price of alcohol.

The Opposition was quick to blame the alcohol price increase on the
government, with its Treasury Spokesman Malcolm Turnbull saying the
“alcopops” tax introduced ahead of the May Budget pushed up spirits prices.

“We’ve seen the spirits component increase by over 6 per cent thanks to the
tax as we said it would,” he said.

“That’s the highest increase since 1980. The Budget is putting up the price
of alcohol, putting up the price of private health insurance, putting up the
price of luxury cars. The Government could have chosen not to put up the
price of alcohol, but it did and that has flowed into the inflation numbers”

The Treasurer Wayne Swan said he had inherited inflation at a 16-year high.
“It didn’t happen overnight. It has been building for a long time and it
will take time to deal with. There is no point in trying to sugar-coat it,”
he said.

Most Canberra price rises were weaker than the national average. Canberra
clothing prices increased by 1.7 per cent, well below the national average
of 3 per cent. Canberra household goods prices moved hardly at all while
national prices climbed 1.6 per cent. Canberra fresh fruit prices fell by
18.7 per cent, far more than the national average of 7.4 per cent.

The weaker consumer prices reflect a weaker ACT economy.

The ACT was the only state or territory whose economy contracted in the
March quarter according to state final demand figures released last month.

On an annual basis economic activity in the ACT scarcely grew at all.

At the time the Acting Chief Minister Katy Gallagher blamed the election of
the Rudd Labor Government for the downturn saying that “a change in
government nationally has resulted in a temporary slowdown in public
spending which was confirmed by the efficiencies announced in the federal

The so-called underlying rates of inflation watched by the Reserve Bank were
lower than the headline rates and fell in the June Quarter, raising the
possibility that inflationary pressures have peaked.

“Strip out housing and financial services and the inflation result improves
dramatically, down from 4.5 per cent to 3.3 per cent,” said Commonwealth
Securities chief economist Craig James.

“If you go further and take out petrol - another factor outside Reserve Bank
influence - all of a sudden the inflation reading doesn’t look so bad after

“The main worry for the Reserve Bank is that the community may start to get
used to inflation readings above 4 per cent and they start to become the
norm rather than the exception.”

The Reserve Bank board will meet to consider the future of interest rates in
two weeks time on Tuesday August 5.


Anonymous said...

Pray tell, how does one “strip out” housing from their daily life.
Possibly they will need to convert their motor vehicle into an abode, so they can strip out fuel as well. I will leave financial services alone, as this is more easily striped out of ones life if required.

It is a bit hard to survive without, food, shelter, energy for either climate control, transportation, light and the rest of modern cons, clothing helps as well, but this is more a social constraint.

Even a inflation rate of 3.3% is bad, 4.5% is just a lot worse. Any inflation rate is bad for any money you may have saved, or the purchasing power of your income, especially if it is fixed, or does not increase at the same rate as inflation.

On the flip side it is good for debts, hence why banks charge higher interest rates to compensate for high inflation rates. (It is not done to control spending, because if you have no debts, interest rates have little influence on what you may or may not spend your income or savings on. It does reduce the “demand” for “deficit spending”, be it government, corporate, household or personal. After that you are left with “need”.

What the Reserve Bank can influence, is both highly subjective and debatable, but they can only control one thing and that is the cash rate, and unless you are an ADI or government (and in Australia Federally it is purely political as they have no debt), it means very little as all variable mortgage rate holders are currently experiencing.

Inflation is always bad for someone, it just a matter of who it is currently bad for.

It was bad for first home buyers as well as financial stock buyers (it was good for the sellers) when there prices where going up, now it appears to be bad for eaters and transportation users, and on average worse for every one generally.

The Reserve Bank, maybe able to influence inflation, but it can not control where it goes.

2% inflation halves your savings (or current purchasing power) every 50 years, 4% is doing it every 25 years.

BaNjo sMytH said...

Thanks for your insight.

When you take away those two factors it does change the outlook!


Banjo Smyth

Anonymous said...

Good analysis by anonymous. I have just done a quick calculation of what inflation is if everything, not just housing and financial and petrol, is stripped out.

It is a staggering zero percent (0%).

If only the cpi was based on nothing we would be fine.

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