<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

<html><body>
<p>GUEST OBSERVER</p>
<p>The Q2 CPI printed 0.4percent compared to Westpac’s forecast for 0.5 percent. The market median was 0.4 percent. The annual rate is now just 1.0 percentyr compared to 1.3 percentyr in Q1 which is the lowest rate of annual inflation since June 1999.</p>
<p>The core measures, which are seasonally adjusted and exclude extreme moves, rose 0.48 percent compared to the market’s expectation of 0.4 percent rise. Westpac’s forecast was lower at 0.35 percent. In the quarter, the trimmed mean gained 0.51 percent while the weighted median lifted 0.44percent. The annual pace of the average of the core inflation measures is now 1.5 percent from 1.5 percent in Q1 (Q1 was revised from 1.4 percentyr).</p>
<p>The six month annualised pace of core inflation came in well below the band at a very 1.3 percentyr pace, this is the fourth quarter in a row it has been below the bottom of the target band and the lowest six month annualised pace since the 1.3 percenty print in March 1999 (a seventeen year low).</p>
<p>Click to enlarge</p>
<p><img src="/images/2016/07/27/Screen%20Shot%202016-07-27%20at%201.57.09%20PM.png" alt=""></p>
<p>Helping to hold the core measures down, but not pushing the pace even lower, was the modest 0.4 percent rise in housing cost which is a small lift from the 0.3 percent in Q1. Rents held a very subdued rise of just 0.2 percent (from 0.1 percent in Q1) but of more interest was the 0.9 percent bounce in house purchases from the very mild 0.2 percent in the March quarter. In the quarter dwelling prices rebounded in Sydney (1.5 percent from 0.5 percent in Q1), Melbourne and Brisbane (both 0.9percent from 0.4percent) easing fears that we may be seeing a significant slowdown in housing costs which would pin down both core and non-traded inflation.</p>
<p>Non-traded prices rose 0.4 percent in Q2 as a boost to health costs (2.6percentqtr) added to the lift from housing costs. </p>
<p>Traded goods prices rose 0.6 percentqtr following a very weak –1.4percent in Q1. The June quarter saw something of a reversal for the auto fuel prices (+5.9 percentqtr vs –10percent in Q1) and fresh fruit &amp; vegetables (1.7percent vs –4.3 percent in Q1). However, excluding fuel, food and tobacco traded goods rose a modest 0.3 percentqtr which is only a modest bounce from the 1.3 percent decline in Q1. This left this ‘core’ measure of traded goods prices at a very modest 0.3percentyr.</p>
<p>Our March quarter observation about across the board weakness in Australia retail prices was modestly reversed in the June quarter with some recovery housing costs, a lift in health costs and some sign of AUD pass-through with 2.0 percent lift in clothing &amp; footwear prices. As such, it does provides at least some near term relief from fears that the outlook for inflation could be significantly lower than what the RBA is currently expecting. </p>
<p>It does not, however, remove those fears as falling food prices (ex-fresh fruit &amp; vegetables), recreational goods and car prices highlight that the pressure on margins remain. </p>
<p><strong>Outlook for the RBA – Bill Evans, Chief Economist. </strong></p>
<p>The underlying measure of the inflation printed 0.48percent to two decimal places. That was above our forecast of 0.4percent. Annual underlying inflation held steady at 1.5percent – outside the 2-3 percent target range.</p>
<p>We pointed out in our note last week that the risk in the number was in the “house purchase” or “construction costs” that printed 0.9percent compared to our expectation of 0.3percent. However the other housing component that captures the housing effect – rents remained subdued at our forecast number of 0.2percent.</p>
<p>The RBA sees the disinflationary “forces” coming from weak wages growth; tight retail margins; and slowing housing costs while it is less convinced about the “pass through” effect of the fall in the AUD.</p>
<p>Evidence of sagging wages growth and disinflationary global pressures provide little evidence that “something will turn up” to reverse this ongoing “below target zone” performance.</p>
<p>The retail margin squeeze was apparent with food; household goods; and cars, although not in clothing and footwear. The housing slowdown eased in the quarter.</p>
<p>Recall that the RBA’s own forecast for underlying inflation for the year to June quarter was 1.5 percent – so this number will be in line with their forecasts.</p>
<p>Also recall that the RBA forecast for underlying inflation in 2016 is 1.5 percent and 2.0 percent in 2017.</p>
<p>That forecast, in May, used “market pricing” which at the time incorporated a further full rate cut by year’s end.</p>
<p>We can only assume that the Bank  will continue to accept that another rate cut , some -time in 2016, will be necessary to achieve these “barely acceptable.” forecasts in the context of a Bank that targets a 2-3 percent inflation “zone”.</p>
<p>Another way to look at this number is that at 0.48percent still “annualises” to a “below target range” number. Of course, the 6 month annualised number is running at 1.3percentyr.</p>
<p>In our view this report is still consistent with a rate cut of 0.25 percent next week.</p>
<p>However because there was some “bounce back” in the number the case can be made to wait if there is a fundamental philosophical resistance to cutting.</p>
<p>Evidence of that “resistance” softened in the recent Board minutes where the Board appeared to be more cautious around both the labour market and the housing market.</p>
<p>With the market expecting a rate cut and most commentators supporting that position the best policy still appears to be another cut.</p>
<p><span><em>BILL EVANS</em></span><em> is chief economist of <a href="https://www.westpac.com.au/" target="_blank">Westpac</a>. <em>Justin Smirk is ‎senior economist, Westpac Group and can be contacted <a href="https://www.westpac.com.au/about-westpac/westpac-group/" target="_blank">here</a>.</em></em></p>
</body></html>

jchancellor-FAypfDUnLy

Rate cut of 0.25 percent possible: Bill Evans, Justin Smirk

<html><body><div class="page" title="Page 3">
<div class="section">
<div class="layoutArea">
<div class="column">
<div class="page" title="Page 1">
<div class="section">
<div class="layoutArea">
<div class="column">
<p><span>GUEST OBSERVER</span></p>
<p><span>Westpac’s forecast for the headline CPI is 0.9 percent qtr which lifts the annual pace to 1.5 percent/yr from 1.0 percent/yr. </span></p>
<p><span>September is traditionally a stronger quarter (mostly due to the annual price resetting for administrated prices) with the ABS seasonal factor worth 0.3ppts. This results in the seasonally adjusted CPI rising a smaller 0.6 percent/qtr.</span></p>
<p><a href="/images/2016/10/21/Screen%20Shot%202016-10-21%20at%201.54.39%20PM.png" target="_blank"><span>Click to enlarge</span></a></p>
<p><span><img src="/images/2016/10/21/Screen%20Shot%202016-10-21%20at%201.54.39%20PM.png" alt=""></span></p>
<p> </p>
<p><a href="/images/2016/10/21/Screen%20Shot%202016-10-21%20at%201.56.03%20PM.png" target="_blank">Click to enlarge</a></p>
<p><img src="/images/2016/10/21/Screen%20Shot%202016-10-21%20at%201.56.03%20PM.png" alt=""></p>
<p> </p>
<p><span>Key to the solid rise is the strong price gains for food, housing (mostly via utilities) and recreation. Helping to hold the gains down in the quarter were falling prices for auto fuel, communication and clothing &amp; footwear. </span></p>
<p><span>Overall, traded prices are forecast to rise 0.9 percent, despite the 3.4 percent fall in auto fuel prices, which boosts the annual pace from 0.0 percent/yr to 0.6 percent/yr. Excluding fruit, vegetables, fuel and tobacco, traded goods prices are forecast to rise 0.3 percent/0.6 percent/yr in Q3 highlighting just how modest imported inflationary pressures are.</span></p>
<p><a href="/images/2016/10/21/Screen%20Shot%202016-10-21%20at%201.57.21%20PM.png" target="_blank"><span>Click to enlarge</span></a></p>
<p><span><img src="/images/2016/10/21/Screen%20Shot%202016-10-21%20at%201.57.21%20PM.png" alt=""></span></p>
<p> </p>
<p><span>Housing costs remain key to core and non-traded inflation. September quarter saw a significant jump in electricity bills lifting utility costs 5.7 percent/qtr. In 2015Q3 utility prices fell 0.5 percent. Other housing costs remain benign with rents falling in Perth, Darwin and Canberra while dwelling purchase prices have moderated in Sydney, Melbourne &amp; Brisbane while the declines are gathering pace in Perth.</span></p>
<p><a href="/images/2016/10/21/Screen%20Shot%202016-10-21%20at%201.58.34%20PM.png" target="_blank"><span>Click to enlarge</span></a></p>
<p><span><img src="/images/2016/10/21/Screen%20Shot%202016-10-21%20at%201.58.34%20PM.png" alt=""></span></p>
<p> </p>
<p><span>Core inflation (average) is forecast to print 0.4 percent/qtr (0.39 percent at two decimal places) which will see annual core inflation lift to 1.6 percent/yr from 1.5 percent/yr. The trimmed mean is forecast to rise 0.38 percent while the weighted median forecast is 0.40 percent. The six month annualised pace of the average of the core measures is forecast to lift to 1.7 percent/yr from 1.3 percent/yr in Q2 which remains a modest inflationary pulse.</span></p>
<p> </p>
<p><span>The pass through from the early weakness in the AUD did not provide the normal boost you would expect and so we doubt the recent appreciation of the currency will act as a further brake on prices. Outside of housing, where we are forecasting a modest gain following a statistical bounce in Q2, the risks to our forecast are balanced. </span></p>
</div>
</div>
</div>
</div>
<div class="page" title="Page 2">
<div class="section">
<div class="layoutArea">
<div class="column">
<div class="page" title="Page 1">
<div class="section">
<div class="layoutArea">
<div class="column">
<p><span>A quick recap on the June quarter CPI </span></p>
<p><span>The headline CPI came in as expected rising 0.4 percent in Q2. The annual rate is now just 1.0 percent/yr compared to 1.3 percent/yr in Q1, which is the lowest rate of annual inflation since June 1999. </span></p>
<p><span>The core measures, which are seasonally adjusted and exclude extreme moves, rose 0.48 percent compared to the market’s expectation of 0.4 percent rise; Westpac was slightly lower at 0.35 percent. The annual pace of the average of the core inflation measures is now 1.5 percent, the lowest print we have yet seen for this measure. </span></p>
<p><span>The key observations from the June quarter CPI was some recovery in housing costs, a lift in health costs and some sign of AUD pass-through with a 2.0 percent lift in clothing &amp; footwear prices. Given the core print in Q2, and our expectations for Q3, we do think we have seen the low in the annual pace of core inflation. </span></p>
<p>Some solid ‘knowns’ but, as always, many ‘unknowns’!</p>
</div>
</div>
</div>
</div>
<p><span>In the June quarter, while there was still no broad based acceleration in prices, there were some promising signs that we may have found a base in the disinflationary cycle. For the September quarter, we expect a number of one off positive factors will boost the headline measure well above the underlying momentum of core inflation.</span></p>
<p><a href="/images/2016/10/21/Screen%20Shot%202016-10-21%20at%201.59.38%20PM.png" target="_blank"><span>Click to enlarge</span></a></p>
<p><span><img src="/images/2016/10/21/Screen%20Shot%202016-10-21%20at%201.59.38%20PM.png" alt=""></span></p>
<p> </p>
<p><span>There is a known boost (partly seasonally) from fresh fruit &amp; vegetables plus the usual seasonal rise in utilities and domestic holiday travel. Partially offsetting these gains is a fall in automotive fuels, the seasonal fall in pharmaceuticals, domestic holidays and further declines in communication prices. </span></p>
<p><span>However, as always, a large number of unknowns remain. In particular, while we expect house purchase prices will return to a more modest pace than we saw through 2015Q4 and 2016Q1 we wonder if the 0.9 percent/qtr bump in Q2 the start of a new stronger trend. </span></p>
<p><span>We also don’t have access to a lot of the data the ABS uses and, in many cases, it is not possible to replicate the survey process the ABS uses causing many small errors along the way. We use many alternative sources and surveys as a guide but our forecasts are, in the end, subject to a significant amount of personal judgement. </span></p>
<p><span>Automotive fuels are a meaningful drag this quarter. </span></p>
<p><span>One of the most obvious events in the last few quarters has been the extreme volatility in the pump price of automotive fuels. Starting the quarter at $1.22/l the pump price then fell to a low of $1.10/l around mid-August before rallying to a high of $1.18/l at the end of the quarter. In terms of the quarterly averages, we forecast that the price of automotive fuels will fall around 3.4 percent contributing –0.12ppts to the CPI. Fuel is the most significant negative we have identified for the September quarter CPI. </span></p>
<p><span>Fruit &amp; vegetables set for strong bounce. </span></p>
<p><span>For the September quarter we forecast an 8 percent rise in vegetable prices plus a very robust 14 percent rise in fruit prices. All up, the 11.3 percent rise in fruit &amp; vegetable prices will add 0.33ppt to the CPI. </span></p>
<p><span>Running into the spring flush we are looking for softer meat &amp; seafood prices (–0.4 percent) but rising wholesale price late in the quarter means the decline is less than you would usually expect. We are also very aware of the ongoing price discounting in the very competitive groceries space and what appears to be a lack of pass through from the weaker AUD to imported foodstuffs. Our forecasts see food &amp; non-alcoholic beverages contribute 0.35ppt to the CPI. </span></p>
<p><span>Partial re-index of the tobacco excise. </span></p>
<p><span>Tobacco excise is re-indexed to the CPI in the month of September so we incorporate 1/3 of this increase in the September quarter average and the other 2/3 will appear the in December quarter. We are looking for the usual modest gains in alcoholic beverages but note we should be past the greatest pressure from the weaker AUD for imported beverages. </span></p>
<p><span>Seasonal rise for domestic holiday travel costs. </span></p>
<p><span>The BITRE (Bureau of Infrastructure, Transport &amp; Regional Economics) data on best price economy airfares is pointing to the usual seasonal bump for domestic airfares in Q3. So for the September quarter we are forecasting a 1% rise in domestic holiday costs, while the previous weaker AUD will help boost international holiday travel, at the margin (remembering that prices are applied to when the travel is taken not when it was booked). As such we are looking for a 2.6%qtr rise in holiday travel &amp; accommodation. </span></p>
<p><span>Dwelling prices to moderate from Q2 bump. </span></p>
<p><span>The June quarter saw a bump up in dwelling costs (0.9 percent/qtr on average, prices lifting by this much in Melbourne and Brisbane thus supporting the 1.5 percent bounce in Sydney). We are looking for </span>the gains to fall back to around their three quarter average for the cities (0.6 percent/qtr of Sydney and Melbourne, 0.4 percent in Brisbane, 0.3 percent in Adelaide while prices continue to fall in Perth) resulting in a modest 0.4%qtr the price of dwellings purchased.</p>
</div>
</div>
</div>
</div>
<p><span>Housing overall makes a solid contribution of 0.31ppts. </span></p>
<p><span>Rents are expected to remain on a very benign path with a gain of just 0.2 percent. This follows a 0.2 percent in Q2, 0.1 percent in Q1 and a 0.2 percent in Q4. While rents are clearly under pressure in WA and easing in other capital cities, in aggregate they tend to be relatively sticky given the way they are measured in the CPI and so we would expect any downside risk to this forecast to be very modest.</span></p>
<p><a href="/images/2016/10/21/Screen%20Shot%202016-10-21%20at%202.00.49%20PM.png" target="_blank"><span>Click to enlarge</span></a></p>
<p><span><img src="/images/2016/10/21/Screen%20Shot%202016-10-21%20at%202.00.49%20PM.png" alt=""></span></p>
<p> </p>
<p><span>However, electricity prices surged in the September quarter and power companies adjusted prices in the face of rising wholesale prices. All up, electricity prices are expected to rise 8.4 percent. In total utilities are forecast to rise 5.7 percent as the usual Q3 price rising in other utilities is somewhat less than that for electricity. </span></p>
<p><span>Ex-housing, the CPI is forecast to rise 0.6 percent. </span></p>
<p><span>The impact of the AUD is shifting to appreciation without the earlier depreciation having any meaningful impact.<br></span></p>
<p><span>We also expect that we are nearing the end of the inflationary impact, if there has been much impact, of the earlier AUD depreciation. In Q2 and again in Q3 the AUD has strengthened a little. As such, we are making a very small allowance for a bit more pass-through in clothing &amp; footwear and household contents &amp; services. The September quarter normally experiences post-June sales discounting for clothing &amp; footwear and this year we expect the discounting to be a bit less usual. Westpac is forecasting a 0.1 percent fall in clothing and footwear and a 0.8 percent rise (0.07ppt) in household contents &amp; services. </span></p>
<p><span>The one area we do expect to see some pass-through from the weaker AUD is in car prices as the fall in the AUD against the Japanese Yen has been much greater than other currencies given the significant appreciation in the Yen to the US dollar. We are forecasting a 0.2% rise in car prices contributing 0.01ppt to the CPI. Car prices fell 1.4 percent in Q2 and our Q3 forecast is very modest compared to the 1.1 percent gain in 2015Q3. </span></p>
<p><span>Overall seasonality tends to be significant positive in Q3. </span></p>
<p><span>With seasonal re-pricing for administrated goods (ie. rates, utilities, public transport etc), the ABS reports Q3 with a seasonal positive. That is, our seasonally adjusted estimate is 0.3ppt weaker at 0.6% than our headline CPI forecast. There is a caveat however: the ABS conducts concurrent seasonal re-analysis and the revisions to the seasonal factors can be quite significant. </span></p>
<p><span>Core inflation to remain well below the bottom of the band. </span></p>
<p><span>Westpac is forecasting the average of the core measures to rise by 0.39 percent in Q3 with the annual pace lifting to 1.6 percent/yr from 1.5 percent/yr. Traded goods &amp; services are forecast to rise 0.9 percent/qtr with the annual pace accelerating to 0.6 percent/yr from 0.0 percent/yr; non-traded prices are also forecast to rise 0.9%qtr for an annual pace of 2.1 percent/yr from 1.6 percent/yr. The six month annualised pace of the average of the core measures is forecast to lift to 1.7 percent/yr from 1.3 percent/yr in Q2. </span></p>
<p><span>Risks balanced for headline. </span></p>
<p><span>We expect that the pass through from the earlier AUD weakness has all but passed and the fall in petrol prices more than offset by rising housing costs. But core inflation remains well contained. There may be some upside risk for housing, particularly if Sydney is on a new stronger trend, but we are cautious that traded goods in particular may be softer than what we are expecting. </span></p>
<p><span><em>Justin Smirk is ‎senior economist, Westpac Group and can be contacted <a href="https://www.westpac.com.au/about-westpac/westpac-group/" target="_blank">here</a>.</em></span></p>
</div>
</div>
</div>
</div></body></html>

June quarter saw a bump up in dwelling costs: Westpac's Justin Smirk

<html><body><div class="page" title="Page 1">
<div class="section">
<div class="layoutArea">
<div class="column">
<p>GUEST OBSERVER</p>
<p>The Financial Stability Review usually is a straight-forward document with few controversial issues raised.</p>
<p>But in the latest report the Reserve Bank has been uncharacteristically forthright, warning banks for the need to be vigilant and continue to maintain tighter lending standards.</p>
<p>The RBA notes that the “risks to the banking system have somewhat increased over the past six months” but “tighter lending practices will, over time, leave the industry better placed to cope with any future deterioration in the housing market and the broader economy”.</p>
<p>In effect this time round the Financial Stability Review reads a bit like a report card on the banking sector and in that context Aussie banks have been given a pat on the back for the efforts to ensure higher quality loan books. However there is no doubt there is a much more concerned tone from policymakers about the outlook. In effect the report highlighted potential future concerns and stressed that the right measures are put in play now to avoid instability. The key is to ensure that lending standards are not being compromised.</p>
<p>The RBA did provide a further warning to banks on the commercial property sector and even more so on international exposure – “especially housing and agricultural lending in New Zealand where the risks have continued to grow”. </p>
<p>Interestingly the last time policymakers provided a warning of this sort was on the Aussie dollar and the likelihood that it was overvalued and would fall at some point in the future – a result that has played out over the past year.</p>
<p>Encouragingly the Financial Stability Review highlighted the low levels of financial stress being faced by household. Confirming that “labour market conditions, which strongly influence the extent of household financial stress, have improved so far this year”. And importantly there is more comfort within the report with the RBA noting that 16 percent of borrowers are ahead in repayments by two years or more.  </p>
</div>
<div class="column"><a href="/images/2015/10/16/Screen%20Shot%202015-10-16%20at%202.17.44%20PM.png" target="_blank"><span style="line-height: 1.3em;">Click to enlarge</span></a></div>
<div class="column"><span style="line-height: 1.3em;"><img src="/images/2015/10/16/Screen%20Shot%202015-10-16%20at%202.17.44%20PM.png" alt=""></span></div>
<div class="column"> </div>
<div class="column">
<div class="page" title="Page 2">
<div class="layoutArea">
<div class="column"><span style="line-height: 1.3em;">CommSec expects the Reserve Bank to remain on the interest rate sidelines. However the focus over the rest of this year is likely to be on the movements in the Australian dollar and the likelihood of further lifts in the mortgage rates by banks – adding to the downside risks to interest rates.</span></div>
<div class="column"><span style="line-height: 1.3em;"> </span></div>
<div class="column">
<span style="line-height: 1.3em;">According to the latest housing occupancy data, 61 percent of </span><span style="line-height: 1.3em;">households have at least one spare bedroom. The data </span><span style="line-height: 1.3em;">confirms recent trends showing that there is plenty of spare </span><span style="line-height: 1.3em;">capacity in our existing homes, even though we have been </span><span style="line-height: 1.3em;">utilising some of this extra capacity in the past five years. The</span><span style="line-height: 1.3em;"><br></span><span style="line-height: 1.3em;">latest figures have clear implications for the housing industry. If </span><span style="line-height: 1.3em;">Australians are keen to utilise their homes more efficiently then construction will be more constrained in coming years. </span>
</div>
<div class="column"><span style="line-height: 1.3em;"> </span></div>
<div class="column"><a href="/images/2015/10/16/Screen%20Shot%202015-10-16%20at%202.19.24%20PM.png" target="_blank"><span style="line-height: 1.3em;">Click to enlarge</span></a></div>
<div class="column"><span style="line-height: 1.3em;"><img src="/images/2015/10/16/Screen%20Shot%202015-10-16%20at%202.19.24%20PM.png" alt=""></span></div>
<div class="column"> </div>
<div class="column">
<div class="page" title="Page 2">
<div class="layoutArea">
<div class="column">
<p style="line-height: 1.3em;">What does the report say?</p>
<span style="line-height: 1.3em;"></span><span style="line-height: 1.3em;">On Australian Banks, the RBA noted</span><span style="line-height: 1.3em;">: “As noted, most banks have now strengthened the serviceability metrics used in their mortgage lending and taken steps to slow the pace of growth in investor lending towards APRA’s expectations. Banks also report that they are becoming increasingly wary of lending to property developers in markets that look oversupplied. The large banks have enhanced their resilience recently by raising substantial amounts of fresh capital in advance of new prudential requirements</span><span style="line-height: 1.3em;">.”</span>
</div>
<div class="column">
<br><span style="line-height: 1.3em;"> </span><span style="line-height: 1.3em;">On Australian businesses the RBA noted </span><span style="line-height: 1.3em;">“Outside the property sector, risks to the financial system from non- financial businesses remain low and the sector’s finances are generally in good shape. Business failure rates have fallen significantly across most industries and states over recent years and, in aggregate, are close to decade lows, although business failures have picked up a little in recent month”.</span>
</div>
<div class="column">
<br><span style="line-height: 1.3em;">On Australian households the RBA noted </span><span style="line-height: 1.3em;">“Many households have likewise been bolstering their resilience in a number of ways, including paying down their debt faster than contractually required and increasing their offset account balances.” .. “Aggregate mortgage buffers – as measured by balances in offset and redraw facilities – remain around 16 per cent of outstanding loan balances, equivalent to more than two years of scheduled”.</span>
</div>
<div class="column">
<br><span style="line-height: 1.3em;"></span><span style="line-height: 1.3em;">Further, the RBA noted </span><span style="line-height: 1.3em;">“Moreover, price competition for new and lower-risk owner-occupier borrowers remains strong, despite the forthcoming increase in the indicator rate announced by Westpac”.</span>
</div>
<div class="column">
<br><span style="line-height: 1.3em;"></span><span style="line-height: 1.3em;">On housing, the RBA said </span><span style="line-height: 1.3em;">“Large data resubmissions by several banks also indicate that the level of investor lending over recent years has been higher than had initially been reported. Over recent months, lenders have announced changes to a range of price and non-price lending terms and conditions to strengthen lending practices and respond to supervisory expectations (for details, see ‘The Australian Financial System’ chapter). Since then, there have been tentative signs that investor demand has started to cool..”</span>
</div>
<div class="column">
<br><span style="line-height: 1.3em;">On commercial property the RBA noted </span><span style="line-height: 1.3em;">“So far, the near-term risks to the domestic financial system from the commercial property sector appear modest, but they are rising. Although banks’ commercial property exposures declined as a share of their total assets after the financial crisis, growth in this type of lending has picked up in recent years, driven by the major Australian banks and by Asian-owned banks.”</span>
</div>
<div class="column">
<br><span style="line-height: 1.3em;">The RBA has provided special sections in the report dealing with Australia’s shadow banking system</span><span style="line-height: 1.3em;"><span style="line-height: 1.3em;">. At present “The shadow banking sector represents only around 5 percent of financial system assets in Australia. This share is down from over 10 percent in 2007 and well below that for a number of large economies”. “Because </span></span>of its small size and minimal credit and funding links to the regulated banking system, the shadow banking sector in Australia is judged to pose limited systemic risk. Nonetheless, the Reserve Bank and other Australian financial regulators continue to monitor shadow banking activity for signs of risk”.
<div class="page" title="Page 3">
<div class="layoutArea">
<div class="column">
<p><span>Housing Occupancy &amp; costs </span></p>
<span style="line-height: 1.3em;">In 2007/08, the number of people, on average, in Australian homes lifted for the first time since records were first maintained in 1910. The number of people per home rose from 2.51 to 2.56; lifted further to 2.57 in 2009/10 and has lifted further to 2.59 in 2013/14. The number of people per home lifted to the highest levels in 14 years.</span>
</div>
<div class="column">
<br><span style="line-height: 1.3em;">The number of bedrooms per home hit a record high of 3.14 in 2013/14, up from 3.11 bedrooms in 2011/12.</span><br><p style="line-height: 1.3em;">Almost 61 percent of households indicated that they had one or more spare bedrooms in the 2013/14 survey, <span style="line-height: 1.3em;">down from 61.7 percent in the 2011/12 survey.</span></p>
<p style="line-height: 1.3em;">The proportion of households that owned their homes outright rose from 30.9 percent to 31.4 percent in 2013/14. Owners with a mortgage fell from 36.6 percent while renters lifted from 30.3 percent to a record high of 31.0 percent.</p>
<p style="line-height: 1.3em;">What is the importance of the economic data?</p>
<p style="line-height: 1.3em;">The Financial Stability Review is published by the Reserve Bank every six months. The report is basically a health check on the financial sector but it also assesses the state of household and business balance sheets.</p>
<p style="line-height: 1.3em;">The Bureau of Statistics releases estimates of Housing Occupancy &amp; Costs every two years. The data shows whether people are buying or renting and how efficiently people are utilising their homes.</p>
<p style="line-height: 1.3em;">What are the implications for interest rates and investors?</p>
<span style="line-height: 1.3em;">The Reserve Bank has highlighted an array of potential risks for the financial system and in essence given further credence of the need to maintain tighter bank lending standards. Overall the report suggests a slightly dovish tone to the broader economic landscape.</span>
</div>
<div class="column"> </div>
<div class="column">There is significant spare capacity in Aussie homes and there has been a greater willingness in recent years for younger people to share accommodation with others or stay longer in the family home. The trends in housing occupancy have clear implications for builders, developers and building material companies. If the trend to greater utilisation of homes continues then there will be less need to build more homes.</div>
<div class="column">
<br><span style="line-height: 1.3em;">CommSec expects interest rates to stay on hold over the next few months although the risks lie with another rate cut. </span>
</div>
<div class="column"><span style="line-height: 1.3em;"> </span></div>
<div class="column"><a href="/images/2015/10/16/Screen%20Shot%202015-10-16%20at%202.22.26%20PM.png" target="_blank"><span style="line-height: 1.3em;">Click to enlarge</span></a></div>
<div class="column"><span style="line-height: 1.3em;"><img src="/images/2015/10/16/Screen%20Shot%202015-10-16%20at%202.22.26%20PM.png" alt="" width="653" height="228"></span></div>
<div class="column"> </div>
<div class="column"> </div>
<div class="column"><em>Savanth Sebastian is an economist for <a href="https://www.commsec.com.au/" target="_blank">CommSec</a></em></div>
</div>
</div>
</div>
</div>
</div>
</div>
</div>
</div>
</div>
</div>
</div>
</div></body></html>

RBA warning to banking sector: CommSec's Savanth Sebastian

<html><body>
<p>GUEST OBSERVER</p>
<p>Low inflation: The Consumer Price Index – the main measure of inflation in Australia – rose by 0.7 percent in the September quarter, above expectations for a lift of 0.4-0.5 percent. In seasonally adjusted terms the CPI rose by 0.4 percent. The annual rate of inflation rose from a 17-year low of 1.0 percent to 1.3 percent (seasonally adjusted 1.4 percent).</p>
<p>Underlying measures: The Reserve Bank monitors three measures to derive the underlying inflation rate. The trimmed mean rose by 0.4 percent in the September quarter (1.7 percent annual); the weighted median rose by 0.3 percent (1.3 percent annual) and the CPI less volatile items rose by 0.5 percent (1.7 percent annual). Overall, underlying inflation rose by 0.4 percent in the quarter and by 1.6 percent over the year.</p>
<p>Main changes: Fruit prices rose by 19.5 percent in the quarter with electricity up by 5.4 percent, tobacco up by 2.3 percent, vegetables up 5.9 percent and property rates and charges up 4.0 percent. The CPI was dragged lower by a 2.9 percent fall in petrol prices and a 2.5 percent fall in telecom equipment and services.</p>
<p>What does it all mean?</p>
<p>Inflation has lifted from the canvas, albeit with a lot of help from higher prices for fruit and vegetables. Still, the higher headline rate of inflation will serve to lift key measures of inflation expectations and thus make it more likely that inflation will return to the 2-3 per cent target band in coming quarters.</p>
<p>Underlying inflation remains low: up 0.4 percent in the quarter to be up 1.6 percent for the year. But if recent floods cause more food inflation, this will drive headline inflation, and in turn, lift underlying price measures.</p>
<p>It is clear that inflation is still historically low. So, the Reserve Bank can still cut rates if it wants to take out some insurance on a stronger growth/stronger inflation outcome. So a rate can’t on November 1 can’t be totally ruled out. But financial markets are not betting on it – with pricing suggesting that there is a 6 per cent chance of a rate cut in November. And the Reserve Bank is indeed looking for reasons not to cut rates rather than reasons to reduce rates to new record lows.</p>
<p>It is clear that interest rates will stay low for an extended period. Global competition ensures that retailers can’t lift prices in the current environment. </p>
<p>The Reserve Bank would also welcome the fact that coal, oil and iron ore prices are rising, the US economy remains in good shape, China is still expanding at a near 7 percent annual clip and that European growth is looking better. Inflation still faces challenges in returning to 2-3 percent, but prospects of getting back to the band are looking better.</p>
<p><a href="/images/2016/10/26/Screen%20Shot%202016-10-26%20at%2012.30.11%20PM.png" target="_blank">Click to enlarge</a></p>
<p><img src="/images/2016/10/26/Screen%20Shot%202016-10-26%20at%2012.30.11%20PM.png" alt=""></p>
<p><em>Craig James is the chief economist at <a href="https://www.comsec.com.au/default.aspx" target="_blank">CommSec</a>.</em></p>
</body></html>

Inflation edges its way higher from a 17-year low: CommSec's Craig James

<html><body><div class="page" title="Page 1">
<div class="section">
<div class="layoutArea">
<div class="column">
<p><span>GUEST OBSERVER</span></p>
<p><span>The headline CPI lifted 0.4 percent in Q4 compared to Westpac’s and the market’s 0.3 percent forecast. The annual rate is reported as 1.7 percent/yr compared to 1.5 percent/yr in Q3.</span></p>
<p><span>The core measures, which are seasonally adjusted and exclude extreme moves, rose 0.5 percent/qtr on par with the market’s expectation (Westpac was slightly higher at 0.6 percent/qtr). In the quarter, the trimmed mean gained 0.57 percent while the weighted median lifted 0.47 percent. The annual pace of the average of the core inflation measures is now 2.0 percent from 2.1 percent in Q3 (Q3 was revised from 2.2 percent).</span></p>
<p><a href="/images/2016/04/19/Screen%20Shot%202016-04-19%20at%202.51.51%20PM.png" target="_blank"><span>Click to enlarge</span></a></p>
<p><span><img src="/images/2016/04/19/Screen%20Shot%202016-04-19%20at%202.51.51%20PM.png" alt=""></span></p>
<p><span>Of note in Q4 was some signs of pass through from a weaker AUD in the stronger than expected rise in clothing &amp; footwear (1.6 percent/qtr). However, in the quarter this was more than offset by the weaker than expected print from housing (0.1 percent/qtr). </span></p>
<p><span>The March quarter brings solid “knowns” but many ‘unknowns’ linger.</span></p>
<p><span> The March quarter will bring the usual inflationary pressure from health and education. We also see meaningful seasonal increases in tobacco. Another solid known is the significant offset from the fall in automotive fuel prices. But, as always, a large number of unknowns remain. We don’t have access to a lot of the data the ABS uses and, in many cases, it is not possible to replicate the survey process the ABS uses causing many small errors along the way. We use many alternative sources and surveys to guide our forecasts but in the end a large part of the forecast remains a judgement call.</span></p>
<p><a href="/images/2016/04/19/Screen%20Shot%202016-04-19%20at%202.53.44%20PM.png" target="_blank"><span>Click to enlarge</span></a></p>
<p><img src="/images/2016/04/19/Screen%20Shot%202016-04-19%20at%202.53.44%20PM.png" alt=""></p>
<p><span>Automotive fuels are again a significant negative.</span></p>
<p><span>One of the most obvious events in the last few quarters has been the extreme volatility in the pump price of automotive fuels. From a peak at the start of the quarter of $1.20/l, the pump price fell to a low of $1.04/l by the end of February before finishing the quarter around $1.12/l. In terms of the quarterly averages, we forecast that the price of automotive fuels will fall around 11percent producing </span><span style="line-height: 1.3em;">a significant —0.39ppt drag on the CPI. Fuel is again the most significant negative we have found for the December quarter CPI.</span></p>
<p><a href="/images/2016/04/19/Screen%20Shot%202016-04-19%20at%202.57.22%20PM.png" target="_blank"><span style="line-height: 1.3em;">Click to enlarge</span></a></p>
<p><span style="line-height: 1.3em;"><img src="/images/2016/04/19/Screen%20Shot%202016-04-19%20at%202.57.22%20PM.png" alt=""></span></p>
<p><span>We have noted before that the fall in Australian pump prices has lagged behind the Australian dollar price of Singapore gasoline. But at the end of the March quarter there was a lift in the AUD value of Singapore gasoline that was not reflected in the pump price. We previously had wondered if Australian prices had room to fall further, even with no additional fall in Singapore prices, as the spread returned to more normal levels. For now, at least, that spread has been normalised by rising Singapore prices.</span></p>
<p><span>Fruit &amp; vegetables set to be a modest drag.</span></p>
<p><span>This quarter our forecast for a 3 percent rise in vegetable prices is more than offset by the 7 percent fall in fruit prices. All up the 2.4 percent fall in fruit &amp; vegetable prices will provide a 0.07ppt drag on the CPI.</span></p>
<p><span>There are the usual seasonal rises in cereal products, pork and food additives. However, we are careful to contrast the ongoing price discounting we are seeing in the very competitive groceries space against the ongoing pass through of the weaker AUD to import foodstuffs. Our forecasts see food &amp; non-alcoholic beverages contribute less than 0.1ppt to the CPI.</span></p>
<p><a href="/images/2016/04/19/Screen%20Shot%202016-04-19%20at%202.58.30%20PM.png" target="_blank"><span>Click to enlarge</span></a></p>
<p><span><img src="/images/2016/04/19/Screen%20Shot%202016-04-19%20at%202.58.30%20PM.png" alt=""></span></p>
<p><span>Seasonal rise in tobacco prices.</span></p>
<p><span>There is no indexing of tobacco in the March quarter but historically this quarter has tended to see strong rises anyway. We have taken the view that there is a clear risk of a strong rise in tobacco prices again this March quarter. We also note that the Inflation Gauge also reported solid price rises for tobacco in Q1.</span></p>
<p><span>Holiday travel costs will be reversed in Q3.</span></p>
<p><span>Holiday travel was a touch stronger than expected in Q4 following on from a weaker than expected print in Q3. So it would be tempting to put in a softer than usual forecast for Q1 but BITRE (Bureau of Infrastructure, Transport &amp; Regional Economics) data on best price economy airfares is pointing to just a modest decline, as good as flat. So with the Inflation Gauge highlighting some modest gains in domestic holiday travel we have pencilled in a 2percent rise in domestic holiday costs, added to the small 0.5percent rise in international holidays. The rise in international holidays is due to the trickle through impact of the depreciation of the AUD offsetting the usual out of season discounting.</span></p>
<p><span>Dwelling prices have moderated.</span></p>
<p><span>Dwelling prices have been very volatile of late. Melbourne dwelling prices were particularly volatile in 2015 but as the year ended we were surprised by a 0.2percent decline in Sydney dwelling prices - the softest print since Q4 2011. Just as we saw in Melbourne in 2014, we don’t expect this to be repeated and, in fact, a bit of a bounce </span></p>
<p><span>Sydney dwelling prices is very likely.</span></p>
<p><span>Westpac is expecting dwelling prices to hold their more modest pace in Melbourne and Brisbane with the mix of outcomes in the other cities pointing to a 0.6percent gain in Q4.</span></p>
<p><span>Housing overall makes a positive contribution of 0.11ppts.</span></p>
<p><span>Rents are expected to remain on a very benign path with a gain of just 0.3percent (was 0.2percent in Q1 so there are downside risks to this forecast) with modest gains in other housing costs and utilities.</span></p>
<p><span>AUD depreciation will have a modest impact.</span></p>
<p><span>We also expect to see more, if still modest, pass through of the inflationary impact of the AUD depreciation. This will appear as a moderation to the usual seasonal discounting of household contents and services; our forecast for a 0.7percent fall follows on from a 0.6 percent rise in Q4 and an average fall of 1.1 percent in the previous three March quarters. We also expect to see more modest than usual discounting for clothing &amp; footwear, –1.1 percent/qtr compared to –2.5 percent/qtr in the last three March quarters.</span></p>
<p><span>Overall seasonality tends to be negative in Q1.</span></p>
<p><span>Despite the usual seasonal rise in pharmaceutical, heath services and education in Q1, the ABS now reports Q1 with a seasonal negative as our seasonally adjusted estimate, using the current ABS seasonal factors for March 2016, is 0.1ppt stronger at 0.5 percent than our headline CPI forecast. In fact rounding hides the full impact of the seasonal adjustment, 0.15ppts at two decimal places. Seasonal discounting in clothing &amp; footwear and household contents are now having a greater impact on seasonality in the survey than the annual price resetting in administrative prices.</span></p>
<p><span>There is an important caveat however: the ABS conducts concurrent seasonal re-analysis and the revisions to the seasonal factors can sometimes be quite significant. As such, we caution that we can’t be sure what the ABS will estimate as the seasonal impact in Q1. This matters as the components of the CPI are seasonally adjusted before they are trimmed for the core measures. As such, revisions to the seasonal factors can impact not just the current estimate of core inflation but also historical estimates.</span></p>
<p><a href="/images/2016/04/19/Screen%20Shot%202016-04-19%20at%203.04.07%20PM.png" target="_blank"><span>Click to enlarge</span></a></p>
<p><span><img src="/images/2016/04/19/Screen%20Shot%202016-04-19%20at%203.04.07%20PM.png" alt=""></span></p>
<p><span>Core inflation to remain at the bottom of the band, just.</span></p>
<p><span>Westpac is forecasting the average of the core measures to rise 0.6percent in Q4 with the annual pace holding flat at 2.0percentyr.</span></p>
<p><span>Traded goods &amp; services are forecast to fall 1.3 percent/qtr moderating the annual pace to 0.7 percent/yr from 0.8percentyr; non-traded prices are also forecast to rise 1.2 percent/qtr lifting the annual pace to 2.5 percent/yr from 2.3 percent/yr. Non-traded prices remain the key source of inflationary pressures with the focus still on housing and recreation.</span></p>
<p><span>Risks balaced for headline, downside for core.</span></p>
<p><span>A seasonally soft March quarter is a recent phenomena that emerged during the time of a very robust AUD which appears to have inspired greater post-Christmas sales discounting. This March, we are expecting some modest pass through from the weaker AUD but falling petrol prices and modest gains in housing costs will keep the lid on both headline and core inflation. While the Melbourne Institute Inflation Gauge points to a robust Q1 CPI print, we acknowledge downside risks to our core inflation forecast as core inflation has recently tended to surprise us on the soft side. </span></p>
<p><span> </span></p>
<div class="page" title="Page 2">
<div class="section">
<div class="layoutArea">
<div class="column">
<div class="page" title="Page 3">
<div class="section">
<div class="layoutArea">
<div class="column">
<p><em>Justin Smirk is ‎senior economist, Westpac Group and can be contacted <a href="https://www.westpac.com.au/about-westpac/westpac-group/" target="_blank">here</a>.\</em></p>
</div>
</div>
</div>
</div>
</div>
</div>
</div>
</div>
</div>
</div>
</div>
</div></body></html>

Australian Q1 CPI preview: Westpac's Justin Smirk

<html><body>
<p>GUEST OBSERVER</p>
<p><strong>The rise in the CPI was well below expectations ... </strong></p>
<p>Regarding the headline, the CPI rose 0.5% in Q3, well below expectations. The annual rate was flat at 1.5%yr and only marginally up on the recent low of 1.3%yr in the March quarter. </p>
<p>When you compare the chart of expected contributions to the Q3 CPI with the chart of actual contributions you can see there was widespread weakness or dissapointment. The one upside surprise is motor vehicles where prices rose slightly rather than falling as expected.</p>
<p><strong>... &amp; the ABS estimates a significant positive seasonality ... </strong></p>
<p>The ABS estimates significant positive seasonality for the Septmember quarter of –0.4ppts. That is prices tend to see a larger rise in Q3. As such, the seasonally adjusted CPI rose just 0.1%qtr in the September quarter. </p>
<p><strong>... so core measures softer at 0.3%qtr.</strong></p>
<p>The core measures, which are seasonally adjusted, came in at an average of 0.3%qtr, softer than expectations for a 0.5%qtr print. In the quarter, the trimmed mean rose 0.28%qtr while the weighted median lifted 0.29%qtr.</p>
<p>The annual pace of the average of the core inflation measures is now 2.2%yr, which is below the mid-point of the RBA’s target band. In addition, the six month annualised pace is just 2.5%yr, a moderated from the recent peak of 2.7%yr in Q1. Before that, the peak for the six month annualised pace of core inflation was 3.1% in 2013Q4. </p>
<p><strong>Is retail competition holding back traded goods inflation? </strong></p>
<p>What was particularly interesting was the very modest rise in food prices of just 0.1%qtr. There was a softer than expect 0.2% rise in fresh fruit &amp; vegetables due to the mix of a 8.2% rise in fruit mostly offset by a 5.9% fall in vegetables. Also falling in price in the quarter were bread &amp; cereal products, dairy &amp; related products, other food products and non-alcoholic beverages. We know that Australia’s grocery chains have been under increasing competition from new entrants who have been improving their domestic supply chains, opening new stores and openly competing with the incumbents on price. We suspect that this is not only holding prices down, despite rising wholesale prices associated with seasonal conditions and the weaker AUD, but actually pushing prices lower.</p>
<p><strong>We were surprise in Q2 by the soft 0.3%qtr rise in meals out &amp; take away foods; in Q3 there was the more normal rise of 0.6%qtr. </strong></p>
<p>Other areas where we are saw ongoing deflationary pressures in tradable goods in the quarter was in telecommunications equipment &amp; services (–2.0%), clothing &amp; footwear (–1.1%), fuel (–1.7%), audio visual &amp; computing equipment (–1.4%) and somewhat surprisingly, domestic holiday travel &amp; accommodation (–0.9%). The later followed a surprising 5.4% fall in domestic holiday prices, which was much weaker than what the airfare data was suggesting. Was the correction or transfer into the CPI data delayed until the December quarter?</p>
<p>We had expected that sometime weaker AUD impact on international holiday prices to appear sometime in 2015 but in the June quarter we were surprised with the fall of 1.3%. We may now be seeing the start of the AUD depreciation impact of the with the 4.6% rise in the September quarter.</p>
<p><strong>Non-traded prices are steady </strong></p>
<p>The pace of non-traded inflation remains modest with a 0.4% gain in Q3 holding the annual pace flat at 2.6%yr, up from the recent low of 2.3%yr in the December quarter 2014.</p>
<p>Helping to hold back momentum in non-traded inflation this quarter were ongoing modest gains in housing costs. This is due, in part, to a moderation in dwelling prices (0.7%qtr/4.3%yr) as the pace eased back in Sydney (1.1%qtr/7.0%yr from 2.4%qtr/8.1%yr in Q2) and we saw the first outright fall in Perth (–0.3%qtr/1.9%yr) since June 2009.</p>
<p>Dwelling costs inflation is starting to ease in Sydney as it has been doing for some time in the other capital cities. In addition, rental inflation continues to moderate, as does utility price inflation. This all matters. Where housing inflation goes, so too goes non-traded inflation.</p>
<p><strong>Looking forward it is housing remains key but watch the spread of price increases</strong></p>
<p>For Q4, as long as crude oil prices don’t surge again from here, or the AUD collapses, then transport fuel should be a modest drag on the CPI. To some extent, the magnitude of the drag will depend on the refining margin for Singapore gasoline, which we don’t expect to narrow in any meaningful way between now and year end.</p>
<p>We are surprised that the weaker AUD has not shown up more in some price resetting for clothing &amp; footwear, household furnishings and, possibly, audio visual and computing equipment. As such, we have tempered our view on AUD pass through this year. We are also closely watching what is happening to motor vehicle prices; the lower AUD is a positive for prices but the Free Trade Agreements we have signed with major auto producers represent a meaningful offset. Was the 1.1% rise in Q3 just a one off price reset or the start of a more meaningful adjustment for Australian auto prices. We expect to see a little more in Q4.</p>
<p><strong>For non-traded inflation, rents continues to ease and dwelling prices have moderated a touch as Sydney prices come off the boil. </strong></p>
<p>Of course after seasonal adjustment and the trimming of the more extreme moves, housing inflation remains a key factor determining the outlook for core inflation. Our preliminary estimate for the average of the core measures for Q4 is 0.6%qtr/2.2%yr with more negatives trimmed out.</p>
<p> </p>
<p><em>Justin Smirk is ‎senior economist, Westpac Group and can be contacted <a href="https://www.westpac.com.au/about-westpac/westpac-group/" target="_blank">here</a>.</em></p>
</body></html>

Broad based softness points to a retail price squeeze: Westpac's Justin Smirk

<html><body><div class="page" title="Page 1">
<div class="section">
<div class="layoutArea">
<div class="column">GUEST OBSERVER</div>
<div class="column">
<br>We expect Q3 CPI data (on 26 October) to show that underlying inflation has remained weak. On our forecasts, the data are unlikely to be enough to provide confirmation that disinflationary forces are fading.</div>
<div class="column"> </div>
<div class="column">This would complicate the monetary policy outlook, although we don’t expect the RBA to mechanically respond to a low result.</div>
<div class="column"> </div>
<div class="column"><a href="/images/2016/10/13/Screen%20Shot%202016-10-13%20at%202.29.33%20PM.png" target="_blank">Click to enlarge</a></div>
<div class="column"><img src="/images/2016/10/13/Screen%20Shot%202016-10-13%20at%202.29.33%20PM.png" alt=""></div>
<div class="column">
<br><p>We expect the trimmed mean to have risen by 0.3 percent q/q and the weighted median by 0.4 percent q/q. This would see the average of the two measures rise by 0.4 percent q/q and be steady at 1.5 percent y/y.</p>
<p> </p>
<p>Importantly, the risks around this forecast seem tilted to the downside given still weak wage growth, low rental inflation, and ongoing pressure on a broad range of retail prices. A key uncertainty in the forecast is around new house prices. This is the largest item in the CPI at 9 percent of the basket and has been quite volatile over the past year.</p>
<p> </p>
<p>In our view, an outcome for the average of the two underlying measures of 0.3 percent q/q or less would concern the RBA given it would be below the implied RBA forecast and likely trigger a downgrade to the RBA’s inflation profile.</p>
<p>That said, the backdrop is quite different from April when the weak Q1 CPI print was released: the RBA has two rate cuts in the pipeline and recent communication has sounded comfortable about policy settings; the domestic economy looks more robust; commodity prices have risen; the property market has re-energised; and the changes to the statement on the conduct of monetary policy have increased the RBA’s ability to tolerate below-target inflation on financial stability grounds.</p>
<p><a href="/images/2016/10/13/Screen%20Shot%202016-10-13%20at%202.33.39%20PM.png" target="_blank">Click to enlarge</a></p>
</div>
<div class="column">
<p><img src="/images/2016/10/13/Screen%20Shot%202016-10-13%20at%202.33.39%20PM.png" alt=""> </p>
<div class="page" title="Page 2">
<div class="section">
<div class="layoutArea">
<div class="column">
<p>Given this, the detail will be important in assessing any implications for monetary policy. There is little domestic monetary settings can do about global factors (notably competitive pressures weighing on tradable inflation), but the RBA would likely be concerned if there is broad-based weakness across non- tradable inflation.</p>
<p>Should the RBA be confronted with this scenario, we doubt there would be any urgency to respond. Indeed, in such a scenario, we would think it would be more appropriate for the risk of further easing in February to shift, rather than for November.</p>
<p> </p>
<p>Apart from the more robust backdrop, waiting until February would provide the RBA the opportunity to see one more GDP print (on 7 December), one more inflation print (in late January), another round of wages data, as well as a few more months of data on both the housing and labour markets. In addition, the US Federal Reserve is likely to have tightened by that time, which could have consequences for the AUD.</p>
<p>The headline CPI is forecast to have risen by 0.5 percent q/q in Q3, slightly higher than the 0.4 percent q/q Q2 outcome, leaving annual inflation steady at 1 percent y/y. Our daily tracking of petrol prices imply a 3.2 percent fall in the quarter.</p>
<p>THE BROAD THEME REMAINS ONE OF WEAK INFLATIONARY PRESSURES</p>
<p>Retail price inflation is being restrained by global competitive pressures. Meanwhile, weak wage growth – which is showing only tentative signs of stabilising – and low inflation expectations are weighing on non-tradable inflationary pressures1. New house prices are the key exception to this, with inflation in this sector likely to have remained relatively solid given the high level of construction activity.</p>
<p>Consequently, we expect inflationary pressures to remain relatively subdued across a broad range of items, with both tradable and non-tradable inflation expected to remain soft. Indeed, we continue to see a weak inflation environment over the coming year (see Figure 1). </p>
</div>
<div class="column">
<p><a href="/images/2016/10/13/Screen%20Shot%202016-10-13%20at%202.35.09%20PM.png" target="_blank">Click to enlarge</a></p>
<p><img src="/images/2016/10/13/Screen%20Shot%202016-10-13%20at%202.35.09%20PM.png" alt=""></p>
<div class="page" title="Page 2">
<div class="section">
<div class="layoutArea">
<div class="column">Tradable inflation continues to be contained as domestic firms face intense global competitive pressures, which has curbed pricing power and limited the degree of currency pass through (see Figure 3).<br><p>These competitive pressures likely have several years to run across both consumer staples and durables. Indeed, we continue to see weak inflationary pressures across supermarket prices, clothing &amp; footwear, furnishings, and audio visual &amp; computing equipment.</p>
<p><a href="/images/2016/10/13/Screen%20Shot%202016-10-13%20at%202.36.46%20PM.png" target="_blank">Click to enlarge</a></p>
<p><img src="/images/2016/10/13/Screen%20Shot%202016-10-13%20at%202.36.46%20PM.png" alt=""></p>
<p>Meanwhile, weak wage pressure is likely to see market services inflation remain mild and continue to lean on administered inflation. Wage growth is showing tentative signs of bottoming, but any recovery is likely to be a slow process given a significant degree of underemployment. </p>
<div class="page" title="Page 3">
<div class="section">
<div class="layoutArea">
<div class="column">
<div class="page" title="Page 4">
<div class="section">
<div class="layoutArea">
<div class="column">The housing component is forecast to add 0.2ppt to headline CPI, reflecting a seasonal increases in utilities and property rates as well as a rise in new dwelling purchase prices.</div>
<div class="column"> </div>
<div class="column"><a href="/images/2016/10/13/Screen%20Shot%202016-10-13%20at%202.38.09%20PM.png" target="_blank">Click to enlarge</a></div>
<div class="column"> </div>
<div class="column"><img src="/images/2016/10/13/Screen%20Shot%202016-10-13%20at%202.38.09%20PM.png" alt=""></div>
<div class="column">
<br>That said, there is a high degree of uncertainty around new house prices. This is the largest item in the CPI at 9 percent of the basket and has been quite volatile in the past year. Building approvals for houses have remained at elevated levels, but new house price inflation has weakened sharply on a y/y basis (see Figure 6). Given renewed strength in the housing market, we expect a reasonable rise of 0.7 percent q/q in Q3 (after 0.9% q/q in Q2 and 0.2% q/q in Q1).<br><p><a href="/images/2016/10/13/Screen%20Shot%202016-10-13%20at%202.39.45%20PM.png" target="_blank">Click to enlarge</a></p>
<p><img src="/images/2016/10/13/Screen%20Shot%202016-10-13%20at%202.39.45%20PM.png" alt=""></p>
<p>While we expect new house price inflation to continue to remain relatively strong in the coming quarters, upside pressure from this component is likely to fade over 2017-18 as construction activity peaks and then moderates. Indeed, investor finance for new construction has weakened in recent months and suggests building approvals may be close to a peak.</p>
<p><a href="/images/2016/10/13/Screen%20Shot%202016-10-13%20at%202.41.35%20PM.png" target="_blank">Click to enlarge</a></p>
<p><img src="/images/2016/10/13/Screen%20Shot%202016-10-13%20at%202.41.35%20PM.png" alt=""></p>
<p> </p>
<p>Rental inflation (which accounts for 7 percent of the CPI basket) is forecast to remain very weak at +0.2 percent q/q, consistent with surging supply.</p>
<p>Given the supply of apartments coming on stream over the next year (Figure 7) and the investor-led nature of this property cycle, rental inflation is forecast to remain soft over the forecast period – a concern recently highlighted by the RBA. </p>
<div class="page" title="Page 5">
<div class="section">
<div class="layoutArea">
<div class="column">
<div class="page" title="Page 5">
<div class="section">
<div class="layoutArea">
<div class="column">Petrol prices have had a significant influence on headline CPI this year.</div>
<div class="column"> </div>
<div class="column">Our daily tracking suggests petrol prices fell by 3.2 percent in Q3, subtracting 0.1ppt from the headline CPI. We think global oil prices have found a base and forecast a slow upward trajectory from current levels, which will contribute to higher headline inflation in the quarters ahead.</div>
<div class="column">
<br>The communications category is forecast to subtract 0.1ppt from CPI in Q3, with prices forecast to have fallen by 1.8 percent q/q in Q3. Prices for telecommunication and equipment items have been falling since late 2013 and the downward pressure shows no sign of abating. </div>
<div class="column">
<div class="page" title="Page 5">
<div class="section">
<div class="layoutArea">
<div class="column">
<p><span>Tobacco </span><span>prices are forecast to add to headline CPI in Q3, with the annual 12.5% excise increase on 1 September 2016 pushing tobacco prices higher. That said, we note that most of the impact of this administered price rise comes through in the December quarter. </span></p>
</div>
</div>
</div>
</div>
</div>
</div>
</div>
</div>
<div class="page" title="Page 6">
<div class="section">
<div class="layoutArea">
<div class="column">
<p><span>Holiday travel and accommodation </span><span>is forecast to contribute 0.1ppt to quarterly CPI, reflecting a seasonal increase in international travel, while BITRE data points to a jump in domestic airfares.</span></p>
</div>
</div>
</div>
</div>
</div>
</div>
</div>
</div>
<p><em>Jo Masters is senior economist, ANZ and can be contacted <a href="https://www.anz.com/personal/" target="_blank">here</a>.</em></p>
</div>
</div>
</div>
</div>
</div>
</div>
</div>
</div>
</div>
</div>
</div>
</div>
</div>
</div>
</div>
</div>
</div>
</div>
</div>
</div></body></html>

Expect new house price inflation to remain strong: ANZ's Jo Masters

<html><body>
<p class="introbullets">GUEST OBSERVER</p>
<p class="introbullets">The Q3 CPI printed 0.7 percent compared to Westpac’s forecast for 0.9 percent. The market median was 0.5 percent. The annual rate is now 1.3 percent/yr compared to 1.0 percent/yr in Q2 and 1.3 percent/yr in Q1. The June quarter was the lowest rate of annual inflation since June 1999.</p>
<p class="introbullets">The core measures, which are seasonally adjusted and exclude extreme moves, rose 0.3 percent compared to the market’s expectation of 0.4 percent rise. Westpac’s forecast was also 0.4 percent. In the quarter, the trimmed mean gained 0.35 percent while the weighted median lifted 0.28 percent. The annual pace of the average of the core inflation measures is now 1.5 percent/yr from 1.6 percent/yr in Q2 (originally reported as 1.5 percent/yr) and Q1 (Q1 has been revised from an original estimate of 1.4 percent/yr).</p>
<p class="introbullets"><a href="/images/2016/10/26/Screen%20Shot%202016-10-26%20at%201.32.55%20PM.png" target="_blank">Click to enlarge</a></p>
<p class="introbullets"><img src="/images/2016/10/26/Screen%20Shot%202016-10-26%20at%201.32.55%20PM.png" alt=""></p>
<p class="introbullets">The six month annualised pace of core inflation came in 1.7 percent/yr pace, a lift from 1.5 percent/yr in Q2 and the fifth quarter in a row it has been below the bottom of the target band; lowest six month annualised pace since the 1.3 percent/y print in March (a seventeen year low).</p>
<p class="introbullets">Our top of the market forecast was based on large contribution from fresh fruit &amp; vegetables boosting a solid contribution from electricity bills. Fresh &amp; fruit &amp; vegetables rose as expected (11.6 percent) but total food was slightly softer at 1.7 percent (our forecast was 2.1 percent) due to softer prices elsewhere in this grouping. We suspect the ongoing competition from new entrants is keeping disinflationary pressure in this sector.</p>
<p class="introbullets"><a href="/images/2016/10/26/Screen%20Shot%202016-10-26%20at%201.38.43%20PM.png" target="_blank">Click to enlarge</a></p>
<p class="introbullets"><img src="/images/2016/10/26/Screen%20Shot%202016-10-26%20at%201.38.43%20PM.png" alt=""></p>
<p class="introbullets">The lift in electricity bills was there but it was about half of what we had expected with utilities lifting 2.5 percent vs our expectation for 5.7 percent. Rents rose 0.3 percent (0.2 percent expected) while dwelling purchases lifted 0.4 v (as expected). All up housing rose 1.0 percent vs our expectation for 1.4 v (a 0.23ppt contribution vs 0.31ppt forecast).</p>
<p class="introbullets">Two areas of upside surprise were clothing and footwear (0.3 percent vs –0.1 percent expected) and household contents &amp; services (1.1 percent vs 0.8 percent expected). While this is only a modest upside surprise it does suggest we are finally seeing some pass–through from the earlier devaluation of the AUD and higher raw input costs.</p>
<p class="introbullets">The modest gain for housing has been key to holding down core inflation. The large rise in electricity bills is trimmed out of the core measures while the subdued gains for dwellings and rents remain in. In the quarter dwelling price gains eased back in Sydney (0.5 percent from 1.5 percent in Q2 and 0.5 percent in Q1) as did Brisbane (0.4 percent from 0.9 percent in Q2 and 0.4 percent in Q1) while Melbourne has picked up the pace (0.8 percent from 0.9 percent in Q2 and 0.5 percent in Q1). Dwelling prices continue to decline in Perth falling 0.4 percent (from –0.1 percent in Q2 and –2.2 percent in Q1).</p>
<p class="introbullets"><a href="/images/2016/10/26/Screen%20Shot%202016-10-26%20at%201.40.06%20PM.png" target="_blank">Click to enlarge</a></p>
<p class="introbullets"><img src="/images/2016/10/26/Screen%20Shot%202016-10-26%20at%201.40.06%20PM.png" alt=""></p>
<p class="introbullets">Non-traded prices rose 0.5 percent in Q3 from 0.4 percent in Q2 which has seen a modest lift in the annual pace to 1.7 percent/yr from 1.6 percent/yr. Given the lift in power bills that boosted this quarter result, and remembering that the September quarter get the usual seasonal boost from the annual repricing of administrated prices, then this is a subdued print.</p>
<p class="introbullets">Traded goods prices rose 1.0 percent/qrt following a 0.6 percent/qtr gain in Q2 and a very weak –1.4 percent in Q1. The September quarter saw something of a reversal for the auto fuel prices (–2.9 percent/qtr vs. +5.9 percent/qtr Q2 and –10% in Q1) while fresh fruit &amp; vegetables build on the modest Q2 gains (11.6 percent compared to 1.7 percent Q2 and –4.3 percent in Q1). However, excluding fuel, food and tobacco traded goods lifted 0.6 percent which is a modest gain from run of softer numbers (–0.3 percent in Q2 and 0.1 percent in Q1). This left this ‘core’ measure of traded goods prices at a very modest 0.9 percent/yr.</p>
<p class="introbullets">So the September quarter was a mixed update with some softness continuing in the non-traded sector but signs of AUD (and rising input costs) inflationary pass-through to clothing &amp; footwear as well as household contents &amp; services. But offsetting this is the clear ongoing competition in the groceries space which is holding down food prices overall. So while we may argue we have seen the low point for core inflation, any acceleration from here is going to be a very mild one. </p>
<p class="introbullets"><em>Justin Smirk is ‎senior economist, Westpac Group and can be contacted <a href="https://www.westpac.com.au/about-westpac/westpac-group/" target="_blank">here</a>.</em></p>
</body></html>

Modest gain for housing key to holding down core inflation: Westpac's Justin Smirk

<html><body><div class="page" title="Page 1">
<div class="section">
<div class="layoutArea">
<div class="column">
<p>GUEST OBSERVER</p>
<p>The Q4 CPI printed 0.5 percent compared to Westpac’s forecast for 0.6 percent.</p>
<p>The market median was also 0.6 percent. The annual rate is now 2.1 percent/yr compare to 1.5yr in Q4, 1.3 percent/yr in Q3 and 1.0 percent/yr in Q2. The June quarter was the lowest rate of annual inflation since June 1999.</p>
<p>The core measures, which are seasonally adjusted and exclude extreme moves, rose 0.4 percent on average compared to the market’s expectation of 0.5 percent rise.</p>
<p>Westpac’s forecast was also 0.5 percent. In the quarter, the trimmed mean gained 0.48 percent while the weighted median lifted 0.38 percent, both on the softer side of expectations highlighting just how modest the broader inflation picture is outside a few isolated sectors. The annual pace of the average of the core measures is now 1.8% from 1.5%yr in Q4 and Q3.</p>
<p>The six month annualised pace of core inflation came in 1.8%yr, a modest lift from the 1.6%yr pace in Q1, making this the eighth quarter in a row the six month pace has been below the bottom of the target ban. Our current forecasts do not see the six month annualised pace of core inflation returning to the band till the March quarter 2018.</p>
<p><a href="https://www.propertyobserver.com.au/images/2017/04/27/Screen%20Shot%202017-04-27%20at%208.25.59%20AM.png" target="_blank">Click to enlarge</a></p>
<p><img src="https://www.urban.com.au/images/2017/04/27/Screen%20Shot%202017-04-27%20at%208.25.59%20AM.png" alt=""></p>
<p>As always there were surprises in the quarter even from the components we have some data on but this time they were quite modest. Our forecast 0.6%qtr was based on large contribution from power bills, auto fuels and the usual seasonal bump in health care, domestic travel and education being partially offset by falling fruit &amp; vegetables, seasonal discounting for clothing, footwear and household contents plus the steady decline in audio visual &amp; computing prices.</p>
<p>What stood out compared to our forecasts was the stronger rise in dwelling prices (1.0%qtr vs 0.5%qtr expected) but this was the only significant upside surprise. Food prices overall fell –0.2% (0.0% expected) while household contents &amp; services were down 1.0% (1.0% expected), health costs rose just 2.0% (2.6% expected), car prices continue to fall (–0.5% vs 0.5% expected) and a surprising 1.9% fall in holiday travel (+0.9% expected) due to an unexpected fall in domestic travel costs.</p>
<p>The March quarter continues the run of softer inflation prints as the competitive margin squeeze appears to remain in place. Dwelling costs have lifted a bit (we don’t know if that is due to the inclusion of attached dwellings prices) and rising power bills are coming through but rent inflation remains very modest. So even with inflationary expectations drifting back towards the long-run average (we suspect fuel and power bills are responsible for this) there is little in this release to suggest that inflation is gathering any momentum. </p>
<p>Our preliminary estimate for the core measures for Q2 2017 is 0.5%qtr/1.7%yr holding inflation below the bottom of the RBA’s target band. </p>
<p>Fuel prices and rising power bills does not change the fact competitive pressures continue to prevent inflation from accelerating.</p>
<p>Rising fuel prices were there, as was the usual seasonal bump in education and health as well as the jump in power bills. And we did see a bit of a lift in dwelling prices (which now includes attached dwellings) associated with strong jumps in Sydney and Brisbane which added to the expected lift in electricity prices. However, as we noted in our preview, there was clear risk that the recent appreciation in the AUD, along with intense competition in the retail space, would limit the upside risks and, in fact, could present some downside risks to our forecasts.</p>
<p>In the end this came through with falling prices for clothing &amp; footwear household contents &amp; services, car prices, audio visual &amp; computing &amp; international travel.</p>
<p>ABS estimates small negative seasonality in the March quarter.</p>
<p>The ABS analysis points to some seasonality in the March quarter CPI with the seasonally adjusted estimate rising 0.55% a percentage point up on the headline 0.45% estimate.</p>
<p>After trimming the core measures rose 0.4 percent/qtr.</p>
<p>The core measures, which are seasonally adjusted and exclude extreme moves, rose 0.4% on average compared to the market’s expectation for 0.5% rise. Westpac’s forecast was also 0.5%. In the quarter, the trimmed mean gained 0.48% while the weighted median lifted 0.38% highlighting just how modest the broader inflation picture is outside a few isolated sectors. The annual pace of the average of the core measures is now 1.8% from 1.5%yr in Q4 and Q3.</p>
<p>The six month annualised pace of core inflation came in 1.8%yr, a modest lift from the 1.6%yr pace in Q1, making this the eighth quarter in a row the six month pace has been below the bottom of the target ban. Our current forecasts do not see the six month annualised pace of core inflation returning to the band till the March quarter 2018.</p>
<p>For a broader core inflation measure, more in line with some international measures, all groups excluding food &amp; energy rose 0.3%qtr/1.5%yr.</p>
<p>Competition is holding back traded goods inflation as the AUD appreciation lowers import prices.</p>
<p>As always there were surprises in the quarter even from the components we have some data on but this time they were quite modest. Our forecast 0.6%qtr was based on large contribution from power bills, auto fuels and the usual seasonal bump in health care, domestic travel and education being partially offset by falling fruit &amp; vegetables, seasonal discounting for clothing, footwear and household contents plus the steady decline in audio visual &amp; computing prices.</p>
<p>In the quarter, the ABS reported a 0.2% decline in food prices with falling fruit &amp; vegetables prices (–1.9% we expected –2.1%) adding to a broader than expected weakness. The rise in auto fuel was much as we expected (5.7%) as were the gains in tobacco &amp; alcohol (1.1%). However, traded goods prices continue to fall overall as clothing &amp; footwear fell 1.5% (our forecast was –1.9%), household contents fell 1.0% (forecast was –0.6%), car prices fell 0.3% (forecast was –0.5%) while the seasonal lift in domestic holiday travel did not happen. In fact domestic holiday cost fell (–0.3% vs 4.0% forecast) compared to the rise that the BITRE data was suggesting.</p>
<p>All up traded prices fell 0.2% in Q1 but due to base effects the annual pace lifted to 1.3%yr from 0.1%yr. We would argue that this soft pace of traded price inflation highlights just how competitive the retail space has become and how retailers have very little ability to pass on any upstream price pressures.</p>
<p>Non-traded prices lifted less than 1.0% in the quarter.</p>
<p>Housing is a key factor underpinning the momentum in core and non-traded inflation. The 0.8% rise in Q1 was much as expected (0.7% forecast) but the composition was interesting. Dwelling purchases gained 1.0% with outsized gains in Sydney and Brisbane (1.3% and 1.9% respectively) adding to the steady 1.0% gain in Melbourne. There has been something of a turnaround in Perth with a 0.2% rise in Q4 but prices fell 0.8% in Q1. We also have to note that we don’t know what impact the inclusion of attached dwelling prices have had on this series. Rents continue to move very gradually higher with a 0.1% gain in the quarter.</p>
<p>Rising energy bills are starting to appear in the CPI with a 2.2% rise in utilities bills in Q1; we had forecast a 2.4% rise. We expect that power bills inflation with gather some momentum through 2017 and there is a clear risk this could extend into 2018.</p>
<p><a href="https://www.propertyobserver.com.au/images/2017/04/27/Screen%20Shot%202017-04-27%20at%208.27.08%20AM.png" target="_blank">Click to enlarge</a></p>
<p><img src="https://www.urban.com.au/images/2017/04/27/Screen%20Shot%202017-04-27%20at%208.27.08%20AM.png" alt=""></p>
<p>Holding back the pace of non-traded price gains was a more modest 3.1% rise in education (3.8% was expected) and a 2.0% gain in health (2.6% expected). The Federal Government has been targeting rising health costs and the Q1 lift in pharmaceutical in particular was smaller than it has been in recent years (4.9% vs 5.7% expected).</p>
<p>Non-traded prices rose 0.9% lifting the annual pace to 2.6%yr from 2.1%yr. Rising housing costs are key to this and without the constraints on education and health non-traded inflation would be rising at a more rapid pace placing some upwards pressure on core inflation. </p>
<p>Looking forward housing remains key as other price pressures remain subdued and the AUD pass through is restrained.</p>
<p>The March quarter was another soft update on inflation. Competitive margin squeeze remains in some consumer sectors while the gains for health and education have been more modest than expect. Dwelling costs have gathered momentum adding to the pressure from power bills but rents inflation is holding a 22yr low. So despite the recent rise in inflationary expectations towards the long run average, the March CPI update suggests that inflation remains well contained.</p>
<p>Our preliminary estimate for the core measures for Q2 2017 is 0.5%qtr/1.7%yr holding inflation below the bottom of the RBA’s target band. Our projections do not see core inflation return to the band until September quarter 2018 while headline inflation is set to ease back below the band by early 2018. </p>
<p> </p>
<p><span>Justin Smirk is ‎senior economist, Westpac Group and can be contacted </span><a href="https://www.westpac.com.au/about-westpac/westpac-group/" target="_blank">here</a><span>.</span></p>
</div>
</div>
</div>
</div></body></html>

Cpi

Editor's Picks

Have something to contribute?

Developments

New apartments

New townhouses

News

Cpi