Inflation stirring

Find above details of today’s ABS CPI release for the March quarter.

Broadly speaking, I have two observations. First, if you look at the above bar graph, it is entirely clear that this is an outlying result vis-a-vis the trend. Roughly 23% of the jump came from fruit and vegetables alone, which is clearly flood related and temporary.

Much more worrying, however, and far from temporary, was the 21% contribution from oil prices, which we saw last week are already hitting producer prices.

So, if fruit and vegetables are the only exceptional item then it looks rather like CPI has suddenly bottomed. Here’s a graph of the eleven major components:

The food and transport jumps are obvious. You can also see a recent tailing up in a number of other sectors.

But the big story surely is the monster at the top that is housing. Talk about taking us all for a rise. Here’s another graph of the housing sub-components:

It’s like the costs associated with a wedding. Anything to do with houses is basically just charge what you want. Utilities show no sign of slowing. Rents look pretty strong. Purchases are only for new homes and they’re flying. And it’s all completely uniterrupted by the GFC. More seriously, this looks like commodity boom fallout. Anything construction or infrastructure related is pouring on the costs as it competes for resources with resources!

Rant aside, the outcome of this CPI is troubling for interest rates. Employment has fallen below 5%, the point at which wages claims tend to accelerate, the NAB survey is suggesting that this is beginning to flow through to employers. Now the CPI appears to have bottomed and this is all despite credit, house price and consumer weakness. Moreover, it’s before the expected capex boom in the resources sector has begun.  

I was expecting a rise in the August/September timeframe. On today’s data it will come sooner.

David Llewellyn-Smith

David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal.

He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.

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    • Adam says Rate hike case closed

      In my opinion the RBA should hike next week. The case is clear and there is no credible counter with the unemployment rate at 4.9 per cent, core inflation spiking and upstream price pressures surging. To suggest that the RBA can or should then sit around and wait now, for what I don’t know, with all the data where it is goes beyond hubris. The RBA has a job to do and they should just get on with it. In my opinion there is nothing left to wait for.

      Unfortunately I think there are just too many egos at stake here with most analysts arguing against the need for rate hikes – and that won’t change after today’s result. And of course I’m expecting a relentless PR barrage over the next few days – the usual stuff we get before every RBA meeting of retailer misery and consumer caution. The reality, we know, is much different with SUV sales at a record and sales of electronics etc very strong indeed. Consumer spending is and has been robust – prices are rising. So while I think the RBA should hike next week I still think June is still more likely given the political pressure the RBA is under from all directions. But I’ll talk more about that over coming days.

      So guys, can you please just put your egos to one side for a moment and see sense?

    • Seconded. Many thanks David. Unless some unexpected event unfolds (eg. the housing slump acclerates and umemployment follows it down the gurgler, GFC II) I agree that we’re seeing the bottom of CPI and hence the interest rate cycle. The problem is it’s “cost of living” components that are most affected. Low income earners will continue to struggle with increases in food, housing, transport, education and health. The fact that an 80″ plasma drops in price is of little consequence.

    • Nice charts. Well done. Feel better now?

      In all seriousness, everything that’s up sharply here will be unaffected by rate rises; Oil, food, utilities, building costs … all of these are being driven by the global commodities boom. Oil and food are beyond the RBA’s control, ditto for utilities, and as H&H rightly points out, building and renovation is competing with mining for skills. The RBA can’t fix that with a rate rise because the demand for resources is external. All it will do is crush the rest of the economy.

      • Have I time warped? That sounds like “contrarian” analysis I was reading in 2007/early 2008. But the RBA jacked up rates then and they’ll do so again if the inflationary train gains speed, regardless of where the momentum comes from.

  1. I’d be surprised if the RBA will realistically increase interest rates in the near future when you have a significant part of the population with serious debt concerns and retail sales slowing. All they will do is send people over the edge and the economy closer to the abyss.

    A breakdown of how much $$$ of the mining sector goes into our economy would be a great eye opener…

  2. Nod, the RBA has made it clear that they are focussed on managing the medium term impacts of the resources boom. If inflation stirrs before it even begins they will raise all right…

  3. The story was similar in 2008, though there was admittedly more local credit and consumption growth. But the expected wave of commodity investment is MUCH bigger now. They will see it as having to deflate the other parts of the economy to reallocate toward the commodities boom…

    • I believe house prices will be the trigger. If they start declining, the RBA will need to rethink and my belief is they will fence-sit for now.

      Retail sales are definitely slowing and this is a major concern as almost 70% of our economic growth is based on consumer spending.

    • They will see it as having to deflate the other parts of the economy to reallocate toward the commodities boom…

      In other words, everyone else must suffer so mining can prosper.

      Surely this must create some resentment in the near future? Even if you include related sectors such as construction and engineering, the mining still employs less than 10% of the population. Having an electorate where 90% are p*ssed off and 10% are rolling in cash is not a situation any government wants to preside over.

      If the punters ever twig that they’re suffering high interest rates and falling house prices so miners can get rich, watch out!

      • Lorax, as H&H said “without it we’d be Ireland”. Your resentment achieves nothing and will poison your wellbeing. Let it go. Chill a little. And be glad we’re not Ireland…yet.

  4. Ok, how many see a rate hike coming in May?
    I don’t think there will be one, despite the pressure via MSM from the Bank Economists.

  5. Banking system stability or maintaining inflation between 2 or 3%, me thinks RBA wont move despite higher inflation, due to slowing economy. definition of stagflation I believe.

  6. Twig Lorax? As if. The populace decisively made this choice in 2010 when it trashed the RSPT.

    The most ridiculous argment published during that period was the egregious “RSPT house price link” by Gotti. That the mining tax would cause a run by the bank’s foreign creditors owing to sovereign risk.

    The argument, if you can call it that, conveniently ignored the the fact that higher inflation and interet rates would result from leaving all of those super profits slowshing around in the economy. Not to mention that it meant the boom could continue completely unmanaged, also increasing interest rates. That’s the real house price risk.

    Of course, the RSPT as it was proposed also left much of the income in the economy, only redistributed to other sectors, including banks, which somehow were going to become a greater risk because of their higher profits. That now looks pretty stupid too. It should always have been for an SWF.

    But that was never Gotti’s argument. He wanted the tax gone and spooked the punters accordingly.

    Now they will pay for it daily.

    • Public opinion changes, and the changes can be quite dramatic. I remember when a certain long serving Prime Minister was kicked out largely because of his skeptical views on climate change.

      • And possibly one in the future, largely for their self-serving reversal of position on imposing a carbon tax? Oh gosh – the very same one that usurped Rudd.

      • Surprisingly 😉 I agree with you here Lorax. Public opinion mood swings are usually all about the hip pocket nerve. And that nerve seems to get pretty twitchy .. even when nothing has *actually* happened (yet) to poke it.

        Very large sections of the MSM have a *lot* to answer for, in irresponsibly headline-seeking by suggesting that a poke or a prod is/may be coming. Even when said poke/prod is only speculation, not realised fact. To wit, TEOTWAWKI vis-a-vis the “climate change” threat, in the case of Howard as you’ve cited. And TEOT(Economy)AWKI, in the case of the RSPT, in the case H&H cites.

    • RSPT was trashed by its very instigators – who in reality preferred power over reform. A SWF was never part of the deal – to reference it is a furphy. Time to move on and not participate in the endless lamentations of “what could have been”. That is ‘woz the miners fault’. Any blame lies squarely at the feet of the incumbent government.

      Time to deal with the reality of what we have – and at present the resource boom is it. Be grateful! It is not (as most MB commentators seem to believe) all bad. Even the high dollar has benefits to certain sectors of the economy. Look for positives!

      • Agreed, in my opinion it was all theatre to quash public opinion. Why bite the hand that fed you? Kevin 07 crashed and burned in the final climatic scene along with his grandiose semantics.

        If the government was fairdinkum it would’ve incrementally looked at boosting royalties rather than taxing profits.

  7. What pisses me off more than anything is the Oil prices are not due to supply issues. I have read countless articles about there is no problem with supply. Its all driven by speculation like it was 2 years ago. That is what upsets me the most as we should not be having to pay this much. Some fatcats are making some good money on this.

    • Speculation is adding to the price of oil, and some fatcats will make huge money in volatile oil markets. But to say there are not supply issues is fallacious.

      Consider this comment from westexas from The Oil Drum –

      “The rate of increase in net exports tends to exceed the rate of increase in production on the production upslope, but on the production downslope, of course the rate of decline in net exports tends to exceed the rate of decline in production.

      Here are total Global Net Exports (countries with 100,000 bpd or more in net exports in 2005) for 2002, 2005 and 2008:

      2002: 39.3 mbpd
      2005: 45.8 (+5.1%/year)
      2008: 45.1 (-0.5%/year)

      The Available Net Export (ANE) trend is also very interesting. Here are 2002, 2005 and 2008 numbers for ANE (Global Net Exports not consumed by Chindia):

      2002: 34.8 mbpd
      2005: 40.8 (+5.3%/year)
      2008: 38.6 (-1.8%/year)

      (BP + Minor EIA input)

      As noted above, ANE increased at 5.3%/year from 2002 to 2005, but then fell at 1.8%/year from 2005 to 2008. Of course, we saw six straight years of year over year increases in annual oil prices from 2002 to 2008.

      If ANE had kept increasing at the 2002 to 2005 rate, then in 2008, ANE would have been 47.8 mbpd, versus the actual volume of 38.6 mbpd, a gap of over 9 mbpd, between what the non-Chindia import market was expecting to see at the 2002 to 2005 rate of increase, versus what was actually delivered.

      IMO, this provides pretty strong evidence that the Available Net Export shock to the system was a key trigger for the financial meltdown in the US. I suspect that Available Net Exports will be down to 27 to 30 mbpd range in 2015, unless we see a collapse in demand from the Chindia region.”

      To see the article this came from –