Last week the ABS released its quarterly CPI series for March 2013. Across various measures, inflation looks to be within the RBA’s range of 2-3%:-
Source: ABS 6401.06
The headline inflation figure (ALL Groups CPI) rose +0.4% (or +0.1% seasonally adjusted) quarter on quarter and +2.5% year on year. The RBA, in assessing its interest rate policy, looks mostly at the trimmed mean and the weighted median in order to understand ‘underlying’ price pressures;
- Trimmed mean (15% of the smallest & largest price movements are removed) +0.3% quarter on quarter and +2.2% year on year.
Weighted media (price change at the 50% percentile by weight of the distribution of price changes) +0.5% quarter on quarter and +2.6% year on year.
Since mid-2008, the trend in the underlying inflation rate suggests that price pressures have been abating and we are appear to be moving more into the lower end of the RBA’s range (compared to where we were at the start of 2010).
Another way to look at the CPI series is to look at tradable v non-tradable items. This helps us to understand the extent to which price changes are attributable to domestic factors (changes in labour costs, productivity) or international factors such as exchange rate movements or changes in supply and demand in overseas markets.
- Tradable component – items whose prices are largely determined on the world market (approx. 40% of CPI by weight). Items are classified as ‘tradable’ if imports or exports represent at least 10% of supply of an item.
- Non-tradable component – the remaining categories (60% of CPI by weight).
- The ‘total supply’ of an item is domestic production plus imports.
Source: ABS 6401.06
Price pressure in Australia appears to be driven by ‘non-tradable’ items. Over the last ten years, the non-tradable component of CPI has been running at an average growth of +3.8% – well above the RBA’s range. These are items in the CPI whose prices are largely attributable to domestic factors – so changes in labour, productivity, profits. Does this mean we are experiencing wage inflation? There are potentially factors other than wages driving these costs.
Delving into the detail of the non-tradables segment, its not the ‘labour-intensive’ categories contributing to price growth:-
Source: ABS 6401.11
The top four items (electricity, medical and hospital services, rents and new dwelling purchases by owner occupiers) account for 45% of the total non-tradable contribution to total CPI (of the last year). It’s very hard to see what might be driving these price changes without delving into each and every product/service category. Prices of two of the top four items (rents & housing) will be determined by returns or market prices. Electricity prices may have been impacted by carbon taxes (a one-off), although electricity prices have been rising since before then on the back on growing demand. My point is that labour prices may not be the driving force behind all of these price changes.
What is this data telling us about prices here in Australia? The average contribution of all other non-tradable categories (90%) is 1.5 index points each – this is not very high. If a household is exposed to each of these product or service categories, then the costs do add up. Most households would be experiencing the impact of electricity changes, but not all households are renters. If you are renter, you won’t be exposed to purchasing an owner occupied dwelling. Households won’t be exposed to each and every category. Some of these categories are discretionary, some are not.
If it is wages driving some of these costs, then somehow, that cost is being off-set or margins are being reduced. Look at the lowest ranking categories above – household staples of eggs, milk, bread and breakfast cereal. These are categories with high household penetration – yet there has been a slight deflationary trend in these prices over the last year. On the bright side, this could be due to improvements in productivity and those savings are being passed onto the retailer and then onto the consumer (although this is not likely in my experience).
I think this data supports the assertion that across most categories, pricing pressure in Australia is low. The exceptions are housing, electricity & medical services.
Looking more broadly at ALL the CPI categories, it may not be surprising to find that housing was the major contributing category to the total CPI change in the March quarter. This category includes rents, new dwelling purchases by owner occupiers, maintenance and repair and property rates and charges. In second place was education, possibly due to the start of the new school year (seasonality).
Source: ABS 6401.11
During the quarter, quite a few categories experienced price falls. Food (mainly fruit and vegetables) & non-alcoholic beverage prices have fallen. In the more discretionary categories such as clothing footwear, furnishings & household equipment, price pressures have also abated. Some of these categories have started to experience a rebound in retail sales (clothing & footwear), possibly as a result of price declines. There has been the assertion that, rather than discounting, these price changes are as a result of ‘convergence’ with global prices. If this is so, then we can expect to see growing margins.
Contrast these more short-term changes with the annual contribution to CPI by group (the same chart on an annual basis);
Source: ABS 6401.11
On an annual basis, housing, utilities and health are the major contributors to inflation in Australia. But note that there are more categories overall making a positive contribution to inflation, albeit modestly.
Across all the major measures, inflation is still within the acceptable range in Australia.