Wednesday, August 03, 2011
Me in today's Age, referencing the RBA:
"The Bank believes inflation is somewhat lower than the official figures suggest, giving it more time before acting than market economists appreciate. The latest consumer price index had inflation at 3.6 per cent, beyond the bank’s 2 to 3 per cent target band. Underlying measures of inflation were also high at a quarterly rate of 0.9 per cent. But the Bank believes those measures were distorted by a number of unusual price measurements and puts the true rate of inflation at a more moderate 2.5 to 2.75 per cent."
Why is that?
1. Primarily it is because the RBA doesn't believe what the ABS reported for shoes, doesn't believe what the ABS reported for clothes etc.
Michael Pascoe sums up its concerns (although as far as I know this is his own thinking rather than the RBA's):
ABS doesn’t shop at Kmart
The RBA believes that even if the ABS did correctly measure what was there in the June quarter, it won't be there in the September quarter. If retailers weren't discounting to shift stock in the June quarter, they will be by the September quarter.
There are other reasons to disbelieve the June quarter CPI.
2. The weights used in it are at the very end of a five-year run. That's too long by international standards. The ABS itself estimates this pushing up the index by 0.2 points per cent per year, with the biggest push at the very end.
3. The 4th biggest part of the CPI, the largely inferred rather than measured “deposit and loan index” is bouncing around all over the place. Next quarter the inferred part will be removed.
4. The extraordinary 39 per cent jump in the price of fruit in the quarter has pushed up both the headline rate and most likely the two underlying rates of inflation.
"Higher fruit prices accounted for an astounding 39 per cent of the increase in the CPI. They won’t last. It’s easy to see that by looking at what happened to the price of vegetables. They shot up 16 per cent in the March quarter after the floods, and then slid back 10 per cent as crops regrew.
Fruit trees take longer to regrow than vegetables, but they do regrow. Not only will the upward pressure from higher fruit prices soon leave the CPI, it’ll soon be replaced by downward pressure as fruit prices return to earth.
You might think none of this should affect the Reserve Bank’s two underlying measures of inflation, the ones that came in at 0.9 per cent you might think. You would be wrong.
One of the measures, the 'trimmed mean' is calculated by arranging all of the price movements in order of size, lopping off the top 15 per cent (of big movers) and the bottom 15 per cent (of small movers or price declines) and then averaging the price changes that are left.
The other measure, the ‘weighted median' also arranges movements in order and cuts out everything other than the middle price change.
How could an enormous price change like that for fruit boost those underlying measures? Not directly. Fruit would be excluded because it was one of the biggest price changes. But if it had previously been included because it was one of the mid-ranking price moves, it will knock one of the other big movers back into the mid-range to take its place; it will push up the trimmed mean indirectly.
It is clear that has happened. A different measure - CPI ex volatiles and deposit & loan facilities - came in at just 0.5 per cent in the quarter and 2.4 per cent over the year."
. The Reserve considered pushing up rates aright
. Attention Reserve Bank: Inflation is not as bad as it looks
. COLEBATCH: The CPI is not a credible basis for policy action