Inflation fading fast

From Westpac:

The Gauge was flat in August (–0.01% at two decimal places) following a  0.2% increase in July and a flat print in June. The annual pace has  accelerated eased back to 2.5%yr in August from 2.6%yr in July and a recent peak of 3.0% in June. The most recent low was 2.1%yr in Oct 2013.

• Whereas a few months ago the gauge was threatening to breach the RBA’s inflation target band, now it has eased back into the mid-point. Westpac had been forecasting inflation to pick up in late 2013/early 2014 and then ease but we have to admit we are surprised by the rate of deceleration.
• The annualised three monthly pace is now just 0.8% from 2.0% in July and 3.8% in June. For the month, Westpac estimates a small historical negative seasonal factor for August and notes we are heading into the seasonally softer fourth quarter.
• The trimmed mean fell 0.1% in August, following a rise of 0.4% in July. The trimmed mean increased by 0.4% over the three months to August, following a rise of 0.5% for the three months to July. In the year to August, the trimmed mean rose by 2.7%.
• TD-MI reports that contributing to the overall change in August were price rises for fruit & vegetables (+2.3%), furniture & furnishings (+1.3%), and  newspapers, books & stationery (+3.8%). These were offset by falls in  health (-0.8%), automotive fuel (-3.5%), and holiday travel &  accommodation (-1.2%).
• The net balance (number of price rises less number of price falls) has eased back to 7 from 14 in July. It is still now less than the long run average of 10  and the 2013 average of 9. It is also a step down for the average of 14 for  the last six months.

• The Q2 CPI surprised with a modest 0.6%qtr and as such, left the Gauge  tracking well ahead of it. The August Gauge is pointing (now we have the  mid-month of the quarter to work with) to a very benign 0.2% rise in the Q3  CPI. But the Gauge has been running well ahead of the CPI and historically,  there have been points like this where the CPI has “caught up”.

As expected. The moment housing slows, rate cuts will flow. Full report here.



  1. Indeed it is going precisely to script. Resilient dollar, rising unemployment, benign inflation.

    Surprised there was any hand-wringing over inflation whatsoever, given that it was clear last year that higher CPI prints were predominantly due to nominal exchange rate depreciation, and therefore transitory until the next leg down. Furthermore, not only was the rising CPI not a problem warranting any form of monetary tightening, but it was in fact a necessary and desirable aspect of Australia’s real exchange rate adjustment (which has a long way to go).

    It’s a bit worrying heading forward, since there seems to be a general lack of understanding that higher ‘inflation’ (that is, CPI readings) are most certainly required in order for Australia to regain competitiveness (provided, of course, that wages are contained).

    • Back in the 1970s, a 5 percent rate of inflation was considered okay; as we have seen in this space, both the Nixon and Reagan Administrations pushed the Fed to ease when inflation was in that range. Even the towering inflation-fighter and Fed Chairman Paul Volcker (1979-87) cooled his guns when inflation retreated to 4 percent.

      Yes, Volcker relented when inflation was double the rate that today sends Fed officials cowering.

      So, to be fair to the invisible man Fed Chief Miller, he presided over a rate of inflation that was up 5 percent from what had been deemed acceptable, or was double the then-acceptable rate. It is key to remember that inflation did not rise from 1 percent to 10 percent on Miller’s watch, but more from the mid-single digits to bottom of the double digits.

      Miller also operated in an economy much more prone to inflation than today. The top marginal tax rate was 70 percent, unions were still a force in the private sector, and international trade was growing but far from levels reached in the 2000s. Transportation, telecommunications and finance were heavily regulated. It was the pre-Internet age, with all the transactions costs of that era. COLA contracts were common.

      Guess what? They didn’t need ZIRP to drive inflation. Actually, looking at Japan, you’re not going to get it either….

    • MJV,

      For all us idiots out there, could you explain again how pro-cyclically pumping double-digit house price inflation improves our competitiveness?

      • Next to Australia’s weak competitiveness profile, I would characterize its soaring housing market as the biggest concern.

        I’m hardly an expert on macroprudential tools but they seem to be having some positive effects in New Zealand and are surely essential if Australia is to have any hope of tackling these two issues simultaneously. Lower LVRs, caps on debt-to-incomes, requirements for banks to hold substantially more capital against home loans, reform negative gearing. There are plenty of ways by which regulators can lean against housing without hiking interest rates.

        You have to ask why we ought to be worried about rapid house price appreciation, and the answer must be the risk of a crash which leads to high unemployment. Well, if we jack up interest rates we’ll get high(er) unemployment, and high it will stay until interest rates are cut and/or the dollar falls. It strikes me as a less-bad alternative to try every means at our disposal to deflate housing without increasing interest rates, and only consider hiking if house prices are truly going berserk.

        Of course, this somewhat academic now since we should have had various MP policies in place back when the RBA was pushing the real cash rate into negative territory. Then if we still found the housing market in its present frenzy, we could countenance higher interest rates as a last resort.

      • Why would higher rates mean higher unemployment? We had higher rates and lower UE 3 years ago.

        Also, from the link I already provided you above

        Moreover, is not clear the United States would get up to 5 percent inflation, even in a robust boom. The traditional model of inflation assumes that an increase in the money supply (assuming static velocity) will boost demand, leading to an increase in output. Competition keeps a lid on prices. Only after output reaches full capacity do sellers ration by price, and then inflation results. In real life, not so clean, but that is the general idea.

        But what of an economy (the United States) that sources globally? Can the U.S. economy really cause global supply lines to reach demand-pull inflation? If Ford raises prices, do Kia and Toyota and BMW?

        Sadly, our central bankers do not even want to find out what level of demand prompts inflation. They think 2 percent inflation is the monetary River Rubicon—and so our Fed is evidently targeting 1.5 percent inflation, as an average. Other prominent monetary thinkers call for zero inflation, or even deflation.

        For me, that says we are in the Economic Dark Ages. What is nearly certain is the United States will never see a robust 1976-1979 type recovery, as long as the Federal Reserve is so obsessed with inflation.

        Interest rates aren’t the only driver of expansion….

  2. The whole point of cutting interest rates is to fire up inflation. Rampant consumers will intuitively sense future price rises and stampede into the shops to buy, buy, buy before the value of their current dollar falls in purchasing power. Goods and services will be produced and employees hired to satisfy the demand. Right? But whose goods and services, and whose employees? Australia’s? I doubt it! All that lower interest rates will do is fire up imported inflation if the A$ falls as many then expect, (NB: I don’t!) and domestic ‘consumers’ will consume the singular non productive commodity they have been for the last X number of years (since capital gains became the only method of staying alive in your debt soaked society) Fill your boots, Australia! Go for it! Cut interest rates. But it won’t help. It hasn’t helped elsewhere for a myriad of different reasons, and will help even less in your sunburnt Land.

    • But it won’t help. It hasn’t elsewhere, and will help less in your sunburnt Land.

      Exactly J see my post above.

  3. Aussie dollar will go to 71 cents over the next 12 months – probably lower if the trends coming out of China continue.

    Add 25% to the cost of everything and tell me about inflation.

      • Well they won’t raise them enough that’s for sure! So we can look forward to a gathering whirlwind sucking up and destroying everything in its path. Those who have some benign view of inflation haven’t tried to run price-taking businesses during such a period. But who gives a RA aboiut those types of businesses eh?

        With tthe exception of the role of robotics all the economic settings in the world are turning. These are not the same as was the case in the 1970’s. Inflation will be harder to contain this time around. Those things that tended towards price stability last time we havd a significant deprteciation of the currency will, this time, add to inflation not reduce it.

  4. Now that inflation is obviously a non event, there is no reason the RBA shouldn’t start cutting again.