A further slowing in growth
The Weekly analyses the impact of the housing downturn on inflation.
For the full picture, download the report – Australian Markets Weekly 6 August 2019
Headline inflation picked up in Q2, increasing by 0.6% in the quarter and 1.6% over the year, where half the quarterly increase was due to a spike in petrol prices. At the other end of the spectrum, housing costs – which have the biggest weight in the CPI at 23% of the basket – continued to restrain inflation, falling for the first time since 1998. The weakness in housing costs reflects new home prices and rents, which also have largest single weights in the CPI at 8% and 7%, respectively. New home prices are barely growing, partly due to tighter access to credit, while rents are rising at the slowest rate in decades.
The weakness in new home prices and rents has weighed slightly on core inflation as together they account f0r 22% of the trimmed mean CPI, which is the measure preferred by the Reserve Bank. Excluding these series, we estimate that trimmed mean inflation is closer to 2%, although it is not clear to us why housing services should be left out of the measurement of underlying inflation, especially when they account for a large share of overall spending, and when trend inflation should ideally average the same as headline inflation over time. Low interest rates should eventually produce a turnaround in housing costs, but we expect it to take time.
Governor Lowe is testifying on policy on Friday, where he should expand on the decision to keep rates unchanged at 1% and retain an easing bias, elaborating on his view that rates are likely to stay low for an extended period. He will also offer an initial assessment on the intensification of the trade conflict between the US and China (the Deputy Governor should offer a more detailed assessment when he speaks on “Risks to the outlook” on 15 August). Note also that Governor Lowe is meeting with other central bankers at the Fed’s annual conference at Jackson Hole, where he is slated to speak on 25 August. As for the Statement on Monetary Policy, today’s policy press release indicates that there are material changes to the bank’s optimistic outlook for growth, although it will now take another year for inflation to return to the 2-3% target band. Unemployment should still fall, but from a higher starting point. On Wednesday, the RBNZ is widely expected to cut by 25bp to 1.25% and maintain an easing bias given the weaker world outlook.
Internationally, the trade conflict between the US and China will dominate the economic data, with the latest intensification being the devaluation of the Chinese currency and the US Treasury accusing China of manipulating its currency.
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