The RBA’s other housing problem.

• For this week’s weekly article, we look at what has caused the low underlying inflation prints seen recently and what implications this has for the outlook for inflation and for the RBA. Your scribes find that housing costs (rents and construction costs) have been a very important driver of recent inflation trends, with slowing rental growth statistically explaining as much as one half of the recent moderation in core measures of inflation the RBA uses in setting monetary policy.

• Our analysis also finds that subdued labour costs have also contributed to weak core inflation reads recently, though again here it is important to distinguish the reasons for this result for monetary policy with wages growth picking up in the non-mining states of NSW and Victoria, while wages growth is well below trend rates in the more mining‑orientated states of WA and QLD.
• Given the mining investment unwind is only around half way through and there is a significant number of new apartments due for completion over coming years, the RBA may have to get used to subdued core inflation readings for some time to come.

• For markets, the past week has been one of talk of further monetary easing coming from a range of central banks. The Bank of England has flagged the need for ‘muscular easing’ to ward off recession risks stemming from the uncertainty from the Brexit vote; the RBNZ has implicitly flagged a likely rate cut at its next meeting; while rumors fly on the scale of Japan’s expected monetary easing and upcoming fiscal stimulus.

• This week for markets will likely again be driven by central banks. CPI numbers will dominate domestically with the RBA Board meeting the following week “live”. Internationally, the US Fed meets Tuesday-Wednesday (announcement due Thursday 4.00am AEST), the Bank of Japan meets Friday, while Q2 GDP figures are released Friday for the US and Eurozone. Profit reporting season will also drive sentiment, with Apple Tuesday, Deutsche Bank Wednesday and Alphabet (aka Google) Thursday.

For full analysis, download report:

•  Australian Markets Weekly:  25 July 2016 (PDF, 362kb)

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