From Westpac and the Melbourne Institute comes the unsurprising result that consumer expectations for inflation have tanked in June and expectations for job losses are reaching some pretty alarming levels, completely ignoring happy ABS figures employment figures.
Inflation expectations moderate & unemployment expectations deteriorate, adding to the case for additional interest rate cuts
The Melbourne Institute survey of consumer inflation expectations reveals a significant moderation. The median inflation expectation was just 2.3% in June, down from 3.1% for May.
The step-up in inflation expectations evident over the first half of this year has been fully reversed. The latest reading is a touch below the 2.4% reported for last December. This is the lowest reading since early 2009 and before that, since 1998.
The median expected inflation rate of Managers & Professionals fell 0.7ppts to 2.8% in June.
Consumers and Managers & Professionals are clearly responding to positive inflation trends in the Australian economy. Prices of key every day commodities, notably food and petrol, have eased in recent times. Domestically, retailers have been discounting aggressively to clear stock. Notably, annual inflation, as measured by the headline Consumer Price Index, dipped below 2% in March, tumbling to 1.6% from 3.5% just six months earlier. While, internationally, turmoil in Europe and patchy growth in the
US and a slowdown in China are placing downward pressure on global prices.
This moderation of inflation expectations will be welcomed by the Reserve Bank, a development which gives them greater scope to lower interest rates.
The Westpac-Melbourne Institute Unemployment Expectations Index deteriorated further in June, continuing a trend which emerged during the first half of 2011.
The Index rose by 3.2% in June and jumped 18% over the last year, indicating that households have become increasingly worried about the labour market. The Index is now at 151, up 39% from the level prevailing at the start of 2011. An Index reading around 151 is relatively high by historical experience. It is on a par with the peak during the synchronised global downturn of 2001. Even so, the index is below the peak during the 2008/09 period.
Household’s growing concerns about unemployment comes against the backdrop of slowing global growth and the ongoing crisis in Europe. It suggests that the domestic labour market is softening and that the unemployment rate, which has been relatively stable of late, after edging higher from the lows of early 2011, is likely to move higher during the second half of 2012. This is consistent with other indicators and with our expectations. Notably, the NAB monthly business survey revealed a marked deterioration of business confidence and business conditions during May, to levels that are materially below par.
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.
