<p>Australia&#39;s inflation, a key metric in the RBA&#39;s future interest rate calls, rose 0.6 per cent over the March quarter, according to data released by the ABS.</p>

<p>The consumer price index (CPI)&nbsp;came in materially lower than what was forecasted across markets and broadly in line with the RBA&#39;s below market expectation.</p>

<p>Westpac was forecasting a one per cent lift in the CPI, with AMP Capital forecasting a 0.9 per cent rise.</p>

<p>The RBA&nbsp;say they will not increase the cash rate until actual inflation is sustainably within the two to three per cent range.</p>

<p>[smartcode_project:default project_id=27728]</p>

<p>For this to occur, wages growth will have to be materially higher than it is currently, which&nbsp;will require significant gains in employment and a return to a tight labour market, the RBA noted at its April board meeting.</p>

<p>The latest results will unlikely change the RBA&#39;s thinking that rates won&#39;t move until 2024 at the earliest.</p>

<p>CPI was 1.1 per cent up annually, compared to the forecasted 1.4 per cent.</p>

<p>New dwelling prices declined 0.1 per cent over the quarter, namely due to the impact of the Federal Government&#39;s HomeBuilder grant and similar grants by Western Australian and Tasmania state governments.</p>

<p>&quot;Without the offset from these grants, the price of new dwelling would have risen, reflecting increases in materials and labour prices in response to strong demand&quot;, head of prices statistics at the&nbsp;ABS&nbsp;Michelle&nbsp;Marquardt said.</p>

<p>&nbsp;</p>


The consumer price index (CPI) came in materially lower than what was forecasted across markets



Joel Robinson

RBA unlikely to advance interest rate moves after lower than expected inflation figures

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<p>GUEST OBSERVER</p>
<p>The consumer price index (CPI) for June 2017 was released earlier this week showed that over the quarter headline inflation was recorded at 0.2% which took inflation to just 1.9% over the year to June 2017. </p>
<p>Although annual headline CPI was temporarily within the Reserve Bank (RBA) target range of 2% to 3% over the March 2017, it has been below target for 10 of the past 11 quarters.</p>
<p><a href="https://www.propertyobserver.com.au/images/2017/08/04/chart-1-1.jpg" target="_blank">Click to enlarge</a></p>
<p><img src="https://res.cloudinary.com/dz9xllyip/image/fetch/c_scale,w_580,q_auto:good/https://s3-ap-southeast-2.amazonaws.com/po.images/2017/08/04/chart-1-1.jpg" alt=""></p>
<p>Adjusting dwelling value growth for inflation provides valuable insight into the housing market’s performance.  With inflation currently at such a low level, adjusting for it is not resulting in any additional capital cities seeing value decline however, over the longer term it does highlight the significant under performance in terms of value growth for certain cities.</p>
<p><a href="https://www.propertyobserver.com.au/images/2017/08/04/chart-2-1.jpg" target="_blank">Click to enlarge</a></p>
<p><img src="https://res.cloudinary.com/dz9xllyip/image/fetch/c_scale,w_580,q_auto:good/https://s3-ap-southeast-2.amazonaws.com/po.images/2017/08/04/chart-2-1.jpg" alt=""></p>
<p>While in nominal terms capital city dwelling values declined in 2008 and then again in 2011-12, in real terms the declines were larger over these two periods and values also declined in 2004-05.  In nominal terms, values fell by -6.1% between March and December of 2008 and by -6.4% between September 2010 and June 2012.  In real terms, values fell by -2.6% between March 2004 and December 2005, by -8.3% between March and December 2008 and by -10.8% between September 2010 and December 2012.</p>
<p><a href="https://www.propertyobserver.com.au/images/2017/08/04/chart-3-1.jpg" target="_blank">Click to enlarge</a></p>
<p><img src="https://res.cloudinary.com/dz9xllyip/image/fetch/c_scale,w_580,q_auto:good/https://s3-ap-southeast-2.amazonaws.com/po.images/2017/08/04/chart-3-1.jpg" alt=""></p>
<p>Since the value declines ceased at the end of 2008, only Sydney, Melbourne and Canberra have actually recorded real growth in dwelling values.  In all other cities, real dwelling values are currently lower than they were at the end of 2008 which is now almost nine years ago.  This data really highlights the uneven nature of growth across the capital city housing markets since the end of the financial crisis. It also shows that low mortgage rates alone are not the driver of the much stronger growth in Sydney and Melbourne.</p>
<p><a href="https://www.propertyobserver.com.au/images/2017/08/04/chart-4-1.jpg" target="_blank">Click to enlarge</a></p>
<p><img src="https://res.cloudinary.com/dz9xllyip/image/fetch/c_scale,w_580,q_auto:good/https://s3-ap-southeast-2.amazonaws.com/po.images/2017/08/04/chart-4-1.jpg" alt=""></p>
<p>The above chart shows the change in real dwelling values across each capital city relative to their most recent market peaks.  The chart again shows that values are only above their previous peak in Sydney, Melbourne and Canberra.  Brisbane values are -9.3% lower than their peak in March 2008, Adelaide values peaked in June 2010 and are still -6.3% lower.  In Perth, the market peak was September 2007 and values are still -20.0% off their peak and in Hobart values are -11.2% lower than their peak which occurred in December 2007.  Finally, Darwin has seen the largest fall in real dwelling values, down -26.7% from its peak with the peak having occurred in September 2010.</p>
<p>The regularly reported nominal value data is valuable however, it is important and interesting to consider the impact of inflation on dwelling values from time-to-time.  As the data shows, outside of Sydney and Melbourne and to a lesser degree Canberra, dwelling value growth has been extremely weak for a number of years now.</p>
<p><span><span>Cameron Kusher is research analyst for CoreLogic. You can contact him </span><a href="https://blog.corelogic.com.au/about/" target="_blank">here</a><span>.</span> </span></p>
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ckusher-ujnxiKuFQs

Since 2008, only Sydney, Melbourne and Canberra have seen ‘real’ growth in dwelling values

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<div>Whoa, there! It seems that inflation has disappeared into a puff of dust!</div>
<div> </div>
<div>Nothing like an outlying result to shake things up a bit, and today's Consumer Price Index (CPI) or inflation result for the March quarter was an absolute ripper!</div>
<div> </div>
<div>Headline inflation printed negative at -0.2 percent. </div>
<div> </div>
<div>This was miles below expectations and the second weakest reading in nearly two decades, taking the annual result all the way down to 1.3 percent (which is well below the target inflation range to 2 to 3 percent).</div>
<div> </div>
<div>The falls were broad based, with six out of the eleven CPI groups recording declines.</div>
<p><a href="/images/2016/04/28/A6.jpg" target="_blank">Click to enlarge</a></p>
<p><img src="/images/2016/04/28/A6.jpg" alt=""></p>
<p> </p>
<div>More importantly, the "core" analytical series, which strips out outlying readings, notched an extraordinarily soft set of numbers to take the respective annual readings to a record low. </div>
<div> </div>
<div>I've diced the data up below to four decimal places, but all you really need to know is that the incredibly weak trimmed mean (0.2 per cent) and weighted median (0.1 per cent) inflation for the quarter have taken the annual readings down to exceptionally low levels at 1.7 per cent and only 1.4 per cent respectively.</div>
<div> </div>
<div><a href="/images/2016/04/28/A5.jpg" target="_blank">Click to enlarge</a></div>
<div><img src="/images/2016/04/28/A5.jpg" alt=""></div>
<div> </div>
<div>Non-tradables inflation, which is taken to be a reasonable proxy for domestic price pressures, fell to its lowest annual reading since some seventeen years ago in June 1999. </div>
<div> </div>
<div><a href="/images/2016/04/28/A1.jpg" target="_blank">Click to enlarge</a></div>
<div><img src="/images/2016/04/28/A1.jpg" alt=""></div>
<p> </p>
<div>In the normal course of things this sort of result would make an interest rate cut a no-brainer.</div>
<div> </div>
<div>While markets are suddenly pricing a cut as soon as next week on Budget day as an each-way bet, it would nevertheless still be quite a surprise to see such a change of narrative from the Reserve Bank so soon. </div>
<div> </div>
<div>That said many analysts will now see June and August as potentially live meetings for rate cuts, which could take the cash rate down to a record low of just 1.50 per cent.</div>
<div> </div>
<div>Generally it is said that easy monetary policy brings inflation in time, but if a lack of investment is the underlying problem then it is questionable whether more rate cuts alone will bring this to the party.</div>
<p><br><span>Anyway, what a result, and a game-changer, indeed!</span></p>
<div>
<br><strong><span style="text-decoration: underline;">Rental growth slowest since 1994</span></strong>
</div>
<div> </div>
<div>There isn't space here to run through all of the positive (education, medical services, pharmaceuticals) and negative (fuel, transport, holidays) contributors to inflation this quarter in detail, but we can see that rental growth has slowed to its lowest level since 1994. </div>
<div> </div>
<div>As you can see depicted in the chart below, the periods when investors were spooked out of the market (1985 to 1987, and 2008) were also precisely the periods when rents spiked.</div>
<div>
<br>Correspondingly the record surge in investor activity since 2012 in response to low interest rates - which Blind Freddy could have predicted - has led to near-record low levels of rental growth.</div>
<div> </div>
<div>Rampant investor lending has now been successfully stymied so equilibrium should return in due course, as the construction boom also passes its peak. It's always interesting and strangely satisfying when markets work just as they should. </div>
<p><a href="/images/2016/04/28/A2.jpg" target="_blank">Click to enlarge</a></p>
<p><img src="/images/2016/04/28/A2.jpg" alt=""></p>
<p> </p>
<div>Rents have continued to rise modestly in most cities through this cycle, but Darwin (-4.4 per cent) and Perth (-4.4 per cent) are in significantly negative territory year-on-year. On the other hand rents kept rising in Sydney by another +2.3 per cent over the year to March.</div>
<div> </div>
<div><a href="/images/2016/04/28/A4.jpg" target="_blank">Click to enlarge</a></div>
<div><img src="/images/2016/04/28/A4.jpg" alt=""></div>
<div> </div>
<div>Looking instead at annual rental growth we can see how Perth has gone from star pupil straight into detention, and now must work through its elevated vacancy rates before annual rental growth reverts to the mean.</div>
<div> </div>
<div><a href="/images/2016/04/28/A3.jpg" target="_blank">Click to enlarge</a></div>
<div> </div>
<div class="separator"><img src="/images/2016/04/28/A3.jpg" alt=""></div>
<div class="separator"> </div>
<div>Rental growth was also negative in Canberra over the year to March (-0.6 per cent) but looks to be heading back into positive territory in the national's capital, while annual rental growth in Hobart increased to 1.4 per cent in the first quarter.</div>
<p><strong style="line-height: 1.3em;"><span style="text-decoration: underline;">The wrap</span></strong><span style="line-height: 1.3em;"> </span></p>
<div>Well, well. A stunningly low inflation result which wrong-footed markets and puts interest rate cuts right back into the frame. Game on.</div>
<div> </div>
<div>
<p><span><em>PETE WARGENT is the co-founder of <a href="https://allenwargent.com/" target="_blank" rel="nofollow">AllenWargent</a> property buyers (London, Sydney) and a best-selling author and <a href="https://petewargent.blogspot.com/" target="_blank" rel="nofollow">blogger</a>.</em><br></span></p>
<p><em>His latest book is <a href="https://www.bigskypublishing.com.au/Books/General-Interest/Four-Green-Houses--and-a-Red-Hotel/1015/productview.aspx" target="_blank" rel="nofollow">Four Green Houses and a Red Hotel</a>.</em></p>
</div>
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pwargent-M4siyDbqQY

Inflation show stopper: Pete Wargent

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<p>GUEST OBSERVER</p>
<p>The Australian Bureau of Statistics (ABS) released consumer price index (CPI) data for the September 2016 quarter last month. </p>
<p>According to the data, headline inflation increased by 0.7 percent over the quarter to be 1.3 percent higher over the year. </p>
<p>Meanwhile, underlying inflation was recorded at 0.3 percent over the quarter and 1.5 percent higher over the past 12 months. Both headline and underlying inflation have increased at a rate below the RBAs target range of 2 percent to 3 percent. </p>
<p>This would usually see the RBA cut interest rates to try and lift inflation however, the previous cuts in May and August, which had the same intent, have not successfully lifted inflation. </p>
<p>What those cuts did manage to do was re-energise growth in housing, particularly in Sydney and Melbourne. </p>
<p>For this reason there is some speculation as to whether the RBA will risk cutting interest rates again given concerns that a lower cash rate will fail to push the dollar lower and lift inflation but add further heat to an already strong housing market.</p>
<p>With the CPI data released, we can pair it with the CoreLogic home value index data to September 2016, in order to obtain an understanding of real growth in values. </p>
<p>Although headline value growth is lower than it was a year ago, so too is headline inflation which mean that real value growth, particularly in Sydney and Melbourne remains strong.</p>
<p><a href="/images/2016/10/31/CoreLogic%201.jpg" target="_blank">Click to enlarge</a></p>
<p><img src="/images/2016/10/31/CoreLogic%201.jpg" alt=""></p>
<p>The above chart highlights the real and nominal changes in home values across each capital city over the 12 months to September 2016.  In both real and nominal terms values have fallen over the past year in both Perth and Darwin while they have increased across each of the remaining capital cities. </p>
<p>There’s also been evidence that along with Sydney and Melbourne, where growth has been strong for almost four years now, value growth has also picked up in other cities such as Adelaide, Hobart and Canberra.</p>
<p><a href="/images/2016/10/31/CoreLogic%202.jpg" target="_blank">Click to enlarge</a></p>
<p><img src="/images/2016/10/31/CoreLogic%202.jpg" alt=""></p>
<p>If you look at the compound annual change in real home values over the past five, ten and 15 years, the 15 year time-frame in most capital city provides the strongest performance. </p>
<p>The clear exception is in Sydney where the last five years have resulted in the strongest annual returns.  In contrast, across all other capital cities except for Perth and Hobart the past five years have recorded the weakest annual growth across each of the three time-frame. </p>
<p>This result really highlights the strength of the Sydney market over the past five years and its relative weakness over the 10 years preceding.</p>
<p><a href="/images/2016/10/31/CoreLogic%203.jpg" target="_blank">Click to enlarge</a></p>
<p><img src="/images/2016/10/31/CoreLogic%203.jpg" alt=""></p>
<p>Since the end of 2008 (ie post GFC), growth in home values has significantly skewed towards the Sydney and Melbourne housing markets. </p>
<p>As highlighted in the above chart, when adjusted for inflation values are lower that they were at the end of 2008 in Brisbane, Adelaide, Perth, Hobart and Darwin. </p>
<p>Sydney and Melbourne have also seen a substantially greater increase in values relative to Canberra which was the only other capital city to have seen an increase in real home values.</p>
<p><a href="/images/2016/10/31/CoreLogic%204.jpg" target="_blank">Click to enlarge</a></p>
<p><img src="/images/2016/10/31/CoreLogic%204.jpg" alt=""></p>
<p>Sydney and Melbourne are the only two capital cities in which real home values are now back above their previous peaks. </p>
<p>After peaking all the way back in the March 2004 quarter, real home values in Sydney are now 35.3 percent higher in Sydney and in Melbourne they are 17.2 percent higher than their September 2010 peak. </p>
<p>All other capital cities are still recording real home values below their previous peaks.  The magnitude of these declines are recorded at: -10.2% in Brisbane, -5.3 percent in Adelaide, -20.2 percent in Perth, -15.6 percent in Hobart, -23.8 percent in Darwin and -1.0 percent in Canberra. </p>
<p>In some of these cities, values peaked many years ago, as far back as 2007 in Perth and Hobart and 2008 in Brisbane.</p>
<p>Although interest rates are low and in real terms homes have been becoming more affordable outside of Sydney and Melbourne it still hasn’t proved to be enough to lure substantial demand and subsequent growth across the other capital cities. </p>
<p>What this highlights is the importance of employment, what sets Sydney and Melbourne apart, outside of more expensive housing prices, is the fact that they both have strong economies which are creating jobs. </p>
<p>Housing affordability alone is no longer enough to attract an increasing level of housing demand, you need a strong economy and the jobs that go along with those strong economic conditions.</p>
<p>Perth and Darwin in particular are well into a fairly substantial value decline phase which is appears set to continue.  Since their respective market peaks in September 2007 and September 2010, real home values are now -20.2 percent and -23.8 percent lower respectively.</p>
<p><em>Cameron Kusher is research analyst for CoreLogic. You can contact him <a href="https://blog.corelogic.com.au/about/">here</a>.</em></p>
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Home values now more than 20 percent down in Perth and Darwin

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<div>A surprisingly soft inflation result, and one which puts further interest rate cuts right back in the frame, if indeed they ever snuck out of shot.<br><br>
</div>
<div>Headline CPI printed at 0.5% for the June quarter for an annual result of just 1.5%, well beneath the target range of inflation, thereby locking in the weakest run of inflation results we have seen in years.<br><br>Indeed the index numbers show that the headline result was weaker still, and only rounding took the headline figure up to 0.5% for the September quarter.</div>
<div> </div>
<div>The soft result was influenced by the declining price of vegetables (!), telco quipment &amp; services, and perhaps more predictably, automotive fuel. </div>
<div> </div>
<div><a href="/images/2015/10/29/Inflation1.jpg" target="_blank">Click to enlarge</a></div>
<div><img src="/images/2015/10/29/Inflation1.jpg" alt=""></div>
<div> </div>
<div><span>Non tradables or domestic inflation came in at a soft 0.4% for the quarter and 2.6% for the year, suggesting that domestic price pressures are fairly subdued, while tradables inflation remained very soft. </span></div>
<div><span> </span></div>
<div><a href="/images/2015/10/29/Inflation2.jpg" target="_blank"><span>Click to enlarge</span></a></div>
<div><span><img src="/images/2015/10/29/Inflation2.jpg" alt=""></span></div>
<div> </div>
<div> </div>
<div>
<span>Despite the Aussie dollar having tanked all the way from above parity against the US dollar to around 71.3 cents after this release, there still seems to be little evidence of inflationary pressure.</span><br><br><span>This is generally viewed as a sign of weakness for the economy, with wages growth sundued and sentiment too weak to see the higher prices of imports to be passed on to consumers.</span><br><br><span>Most significantly of all the underlying measures of inflation - the trimmed mean and weighted median - both came in at just 0.3% for the quarter, for annual prints of  2.1 and 2.2% respectively.</span>
</div>
<div><span> </span></div>
<div><a href="/images/2015/10/29/Inflation3.jpg" target="_blank"><span>Click to enlarge</span></a></div>
<div><span><img src="/images/2015/10/29/Inflation3.jpg" alt=""></span></div>
<div> </div>
<div> </div>
<div>
<div>These figures will be seen to add to the case for further interest rate cuts with inflation sinking towards the bottom end of the target range and unemployment remaining above 6%.</div>
<div> </div>
<div>Futures markets are undecided about an interest rate cut on Melbourne Cup Day next week (62% chance), but hav priced in a high probability of the cash rate being dropped once again before the Christmas break.</div>
<div> </div>
<div>
<p><span><em>PETE WARGENT is the co-founder of <a href="https://allenwargent.com/" target="_blank" rel="nofollow">AllenWargent</a> property buyers (London, Sydney) and a best-selling author and <a href="https://petewargent.blogspot.com/" target="_blank" rel="nofollow">blogger</a>.</em><br></span></p>
<p><em>His latest book is <a href="https://www.bigskypublishing.com.au/Books/General-Interest/Four-Green-Houses--and-a-Red-Hotel/1015/productview.aspx" target="_blank" rel="nofollow">Four Green Houses and a Red Hotel</a>.</em></p>
</div>
</div>
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Veggie price decline influences inflation outcome: Pete Wargent

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<p><strong>EXPERT OBSERVATION</strong></p>
<p>The latest consumer price index (CPI) data released shows that Australia is in deflation, and over the quarter, national rents fell by -1.3 per cent, which was both the largest and first quarterly decline on record.</p>
<p>Nationally, the cost of renting is now back at levels last recorded in March 2017.</p>
<p>Despite falling rents throughout the quarter, the volume of rental searches on realestate.com.au is actually up 38.5 per cent.</p>
<p>Not only are people searching more, the volume of high-intent activity on the rental section of realestate.com.au is also up by 74.5 per cent over the same period.</p>
<p>The results are a clear indicator of how COVID-19 has changed the property market dynamic.</p>
<p>Rental rates are coming under pressure from multiple sources. We have virtually no migration, there is new stimulus encouraging purchasing from first home buyers who otherwise may have been renters, and then there's the fact that unemployment is rising, and younger people are most affected.</p>
<p>With a moratorium on rental evictions in place until September, the next quarter is unlikely to see rental CPI fall as severely. Thereafter it is likely rental rates will fall further and will take quite some time to recover to previous highs.</p>
<p>The high demand on realestate.com.au is likely due to the possibility of finding cheaper and or better rentals, as evidenced by the CPI data.</p>
<p><strong>Cameron Kusher</strong><em> is director of economic research at the REA Group</em></p>
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j.ballantyne1990-6AQqhLzZaK

Falling rental rates unlikely to bounce back soon: Cameron Kusher 

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<p>The Consumer Price Index (CPI) fell 1.9 per cent in the June 2020 quarter, according to the Australian Bureau of Statistics.</p>
<p>"This was the largest quarterly fall in the 72 year history of the CPI,” chief economist for the ABS Bruce Hockman said.<span style="font-size: 12.16px;"> </span></p>
<p>The annual inflation rate was -0.3 per cent in the year to the June 2020 quarter.</p>
<p>"Since 1949, this was only the third time annual inflation has been negative. The previous times were in 1962 and 1997-98,” Hockman added.</p>
<p><a href="https://www.abs.gov.au/AUSSTATS/abs@.nsf/Lookup/6401.0Media%20Release1June%202020/%24File/CPI_July_2020.svg" target="_blank"><img src="https://www.urban.com.au/images/2020/7/29/CPI%20image.png" alt=""></a></p>
<p><span>The June quarter fall was mainly the result of free child care (-95 per cent), a significant fall in the price of automotive fuel (-19.3 per cent) and a fall in pre-school and primary education (-16.2 per cent), with free pre-school being provided in NSW, Victoria and Queensland.</span></p>
<p><span>"Excluding these three components, the CPI would have risen 0.1 per cent in the June quarter", Hockman said.</span></p>
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Consumer Price Index falls 1.9% in June: Australian Bureau of Statistics

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<p>EXPERT OBSERVATION<strong> </strong></p>
<p class="CSbulletlv1"><span style="text-decoration: underline;">Inflation:</span> The Consumer Price Index – the main measure of inflation in Australia – rose by 0.3 per cent in the March quarter (consensus: 0.2 per cent). In seasonally adjusted terms the CPI rose by 0.4 per cent. The annual rate of headline inflation lifted from 1.8 per cent to 2.2 per cent – the strongest pace in 5½ years. </p>
<p class="CSbulletlv1"><span style="text-decoration: underline;">Underlying measures:</span> The Reserve Bank monitors three measures to derive the underlying inflation rate. The trimmed mean rose by 0.5 per cent in the March quarter (1.8 per cent annual); the weighted median rose by 0.5 per cent (1.7 per cent annual) and the CPI less volatile items rose by 0.5 per cent (2.1 per cent annual). Overall, underlying inflation rose by around 0.5 per cent in the quarter and by around 1.7 per cent over the year. Market goods and services less volatile items rose by 0.3 per cent in the quarter to be up 2.1 per cent on the year.</p>
<p class="CSbulletlv1"><span style="text-decoration: underline;">Main changes:</span> The most significant price rises in the March quarter were for food and non-alcoholic beverages (+1.9 per cent), alcohol and tobacco (+1.6 per cent), education (+2.6 per cent) and health (+1.7 per cent). The most significant offsetting price falls this quarter are automotive fuel (-6.0 per cent), domestic holiday travel and accommodation (-3.1 per cent) and international holiday travel and accommodation (-3.0 per cent).</p>
<h2>What does it all mean?</h2>
<p class="bullets">Aussies venturing out to buy essentials at supermarkets during the peak of the coronavirus (COVID-19) crisis would’ve noticed that food had become more expensive. In fact, prices of food and non-alcoholic beverages surged by an annual growth rate of 3.2 per cent in the March quarter – the strongest rate in 5½ years – propelling overall headline consumer prices higher. Why? Supply shortages due to the drought and bushfires – fruit and vegetable prices lifted sharply. </p>
<p class="bullets">The Bureau of Statistics said, <em>“There were some price effects of COVID-19 apparent in the March quarter due to higher purchasing of certain products towards the end of the quarter, as restrictions came into effect. Most notably, rises were seen in, other non-durable household products (+3.4 per cent), which includes toilet paper; personal care products (+2.2 per cent), which includes soap and hand sanitiser; and other cereal products (+4.4 per cent), which includes rice and pasta.”</em></p>
<p class="bullets">The lift in grocery prices broadly aligns with Coles’ sales report today. The supermarket chain not only reported a record 12.9 per cent lift in sales to $9.2 billion during the March quarter, but it also announced that its grocery and food prices rose by 2.6 per cent during the quarter, or by 1.8 per cent excluding tobacco and fresh foods. Why? COVID-19 panic buying saw a surge in shopper demand so the company scaled-back promotional activity with consumers preferring to purchase smaller grocery pack sizes in the frenzy.</p>
<p class="bullets">But before anyone gets too excited about the headline annual inflation rate hitting the lower end of the Reserve Bank’s 2-3 per cent target band, the demand shock from the virus crisis is about to plunge Australia into the deflationary world, a world experienced by Japan and Europe in recent years. In fact, Reserve Bank Governor Philip Lowe warned last week that, <em>“it is quite likely that year-ended headline inflation will turn negative in June. If so, this would be the first time since the early 1960s that the price level has fallen over a full year.”</em></p>
<p class="bullets"> A sharp decline in crude oil and petrol prices, supportive government measures to cap and reduce prices - such as free childcare – tepid wage growth and weaker home rental prices are all likely to be disinflationary. Given the size of the housing cost basket within the consumer price index - around 23 per cent – falling home prices, higher vacancy rates and weaker rents could persist for the rest of 2020, weighing on consumer prices. </p>
<p class="bullets">Slow wage growth and falling prices of consumer goods – such as electronics, clothing and footwear – have been a feature of low-inflation for several years now. And businesses have been reluctant to pass on the rising cost of imported goods (due to the weaker Aussie dollar) amid consumer spending caution and intense competition. The huge impact of the economic shutdown will see deflation persist for a few quarters. In fact, Commonwealth Bank Group economists are forecasting the annual headline rate to fall to just 0.5 per cent in 2020 after turning negative in the June quarter. But the annual underlying inflation measure (trimmed mean) is estimated to hold up at 1.3 per cent in 2020.</p>
<p class="bullets"><strong>RYAN FELSMAN </strong><em>senior economist at CommSec</em></p>
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Highest headline inflation in 5½ years: Ryan Felsman

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<p>EXPERT OBSERVER</p>
<p>The Consumer Price Index – the main measure of inflation in Australia – rose by 0.5% in the September quarter, in line with expectations. In seasonally adjusted terms the CPI rose by 0.3%. The annual rate of headline inflation lifted from 1.6% to 1.7%. The Aussie dollar was unchanged against the greenback in response.</p>
<p>The Reserve Bank monitors three measures to derive the underlying inflation rate. The trimmed mean rose by 0.4% in the September quarter (1.6% annual); the weighted median rose by 0.3% (1.2% annual) and the CPI less volatile items rose by 0.8% (1.9% annual).</p>
<p>Overall, underlying inflation rose by around 0.5% in the quarter and by around 1.5% over the year. Market goods and services less volatile items rose by 0.8% in the quarter (biggest rise in almost four years) to be up 1.8% on the year.</p>
<p>International holiday travel (+6.1%), tobacco (+3.4%), property rates &amp; charges (+2.5%) and child care (+2.5%) recorded the most significant price gains. The most significant offsetting price falls this quarter are automotive fuel (-2.0%), fruit (-3.1%), and vegetables (-2.5%).</p>
<p><strong>What does it all mean?</strong></p>
<p>Inflation remains contained. The headline annual inflation rate has bottomed, but it is creeping, rather than leaping, towards the Reserve Bank’s 2-3% target band. That is more than we can say about ‘underlying inflation’ which solidly remains near 1.5%.</p>
<p>Headline inflation may be boosted by the drought effects on food prices in coming quarters. Higher home prices may serve to lift some price measures in the ‘Housing’ grouping. Wage growth may remain low but it is still outpacing prices. And with productivity growth near zero, the positive real wage growth may be applying some upward pressure on prices – especially in the services sector.</p>
<p>The Reserve Bank has indicated that rate cuts are still possible. But the language from the policymakers suggest that they are very reluctant rate cutters from here. Rates are low enough and the rate cuts have actually been having the opposite to the desired affect – spooking Aussie consumers. And there is evidence to support the ‘gentle turning point’ view of the Reserve Bank. Unemployment fell last month and home prices are again barrelling higher in Sydney and Melbourne. </p>
<p>The Reserve Bank is expected to wait until at least February 2020 to decide if more interest rate stimulus is required.</p>
<p><em><strong>Craig James</strong> is the chief economist at <a href="https://www.comsec.com.au/default.aspx" target="_blank">CommSec</a>. </em></p>
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jrobinson-rf4aSBido9

Inflation rate creeps towards RBA target zone: CommSec

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<p>CPI has risen in line with market expectations for September, according to the latest figures from the ABS.</p>
<p>The 0.5 per cent gains, described by many as "soft", were down from 0.6 per cent in the June quarter. </p>
<p><span>"Despite the price falls for fruit and vegetables this quarter, the drought is impacting on the prices for a range of food products," ABS chief economist Bruce Hockman advised.</span></p>
<p><span>"Prices rose this quarter for meat and seafood (+1.7 per cent), dairy and related products (+2.2 per cent) and bread and cereal products (+1.3 per cent)."</span><br><br><span>The CPI rose 1.7 per cent through the year to the September 2019 quarter. This follows a through the year rise of 1.6 per cent to the June 2019 quarter.</span></p>
<p><span>"Annual inflation remains subdued partly due to price rises for housing related expenses remaining low, and in some cases falling in annual terms. Prices for utilities (-0.3 per cent) and new dwelling purchase by owner-occupiers (-0.1 per cent) both fell slightly through the year to the September 2019 quarter, while rents (0.4 per cent) recorded only a small rise," Hockman noted.</span></p>
<p> </p>
<p><span><img src="https://res.cloudinary.com/dz9xllyip/image/fetch/c_scale,w_580,q_auto:good/https://s3-ap-southeast-2.amazonaws.com/po.images/2019/10/30/Headline%20CPI.jpg" alt=""><br><br>Source: James Foster @JFosterFM</span></p>
<p><span>The RBA prefer to measure core inflation, which eased to 1.4 per cent.</span></p>
<p><span>"No signs of an inflation breakout," Indeed APAC economist Callam Pickering suggested.</span></p>
<p>Westpac had forecasted 0.6 per cent in the September quarter, which even with that figure higher than the market forecasts, would be inline with their prediction for another rate cut before year end.</p>
<p>"While the RBA has been talking mostly about the unemployment rate in recent months, every CPI report is important for its forecasts which are updated just after the release," Westpac's Justin Smirk said.</p>
<p><span>"A core CPI reading in line with our expectations should keep markets pricing in a reasonable risk of another rate cut before year-end."</span></p>
<p>Alex Joiner, economist at IFM, said the figures were in line with RBA's data, which might give them another quarter to asses the data.</p>
<p>CommSec's Craig James says the headline inflation rate is creeping, rather than leaping, towards the Reserve Bank's two to three per cent target band.</p>
<p>"The Reserve Bank is expected to wait until at least February 2020 to decide if more interest rate stimulus is required," James said.</p>
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