Unlike a raft of other countries, the inflation figures only come around once every three months, so it’s worth reflecting on the latest data. (The Reserve Bank is still pushing for monthly figures!)
In the last three months of 2011 there was no change in consumer prices. Even if you use the newer seasonally adjusted measure of prices, the consumer price index (CPI) was up by just 0.2%. Whichever way you cut it, inflation posted the smallest result in three years.
Now this probably comes as no surprise. Retailers are slashing prices to move stock and fruit and vegetable supplies have been replenished after the 2011 floods, leading to lower prices. And until consumers start to spend again, inflation will remain low.
Not only was inflation well contained in the latest quarter, but there were also some historic results. The prices of major household items like fridges and washing machines fell by 3.4% in the quarter – the biggest fall in almost 40 years of records. Similarly prices of small electric appliances like kettles and toasters fell by the same rate and again the biggest fall in 40 years. Then there were dairy goods like milk and cheese – the biggest annual price fall in 38 years. Prices of chips, chocolates and lollies recorded the smallest annual lift in prices in 22 years and book prices recorded the smallest annual lift in prices in 12 years.
Many people are interested in inflation because it provides guidance on interest rates. But in addition to the headline measures of inflation, we need to know what underlying inflation is doing. That is, inflation after stripping out volatile factors. Well, the three underlying measures rose on average by 0.5% in the quarter and 2.6% over the year.
The Reserve Bank likes to look at inflation across six month periods. Underlying inflation has averaged 0.5% a quarter over the last six months or an annual rate of 2.0%.
The bottom line is that inflation is under control and that means interest rates can fall to a “neutral” or normal rate – where rates are not stimulating the economy nor slowing it down. The Reserve Bank assesses this “normal” rate as the average of lending rates over the past 15 years. On average since 1997 the variable housing rate has averaged 7.20% while the current rate is 7.30%. The RBA’s notes that lending rates are “around” the average level, but arguably they should be slightly below average than slightly above.
The week ahead
In Australia a modest offering of economic data releases is on the calendar. But in the US there is the usual bevy of economic indicators, led by the ISM activity gauges and non-farm payrolls (employment) data.
In Australia, the economic calendar is blank on Monday but the private sector credit (lending) figures are released on Tuesday together with the authoritative RP Data/Rismark Home Value index. Consumers and businesses are still reluctant to borrow and this should be reflected in a 0.3% lift in credit in December. Meanwhile Australian home prices rose for the first time in 11 months in November. The lift in prices was just 0.1% but the anecdotes suggest a recovery has begun.
On Wednesday the Performance of Manufacturing index is released together with figures on new home sales. The manufacturing gauge edged back above 50 for the first time in six months in December, suggesting that the sector was starting to grow again. And new home sales soared by 6.8% in November. More positive readings will see traders scaling back rate cut expectations.
And on Thursday international trade data is released together with building approvals. The trade surplus has narrowed for three straight months and we expect that it shrunk again in December to a surplus around $1.2 billion. The high Aussie dollar is particularly affecting tourism receipts, pushing the services deficit to a record high.
The dwelling approvals data has clearly been volatile, falling 14.8% in September and 10% in October but bouncing 8.4% higher in November. We tip another 10% rise in approvals in December in response to two rate cuts, but clearly the trend estimates are more instructive than the seasonally adjusted figures. And the trend figures indicate that housing activity remains soft.
In the US, the week kicks off with data on personal income and spending on Monday together with regional manufacturing surveys covering Dallas and Chicago. Income is expected to lift by 0.4%, outpacing a 0.1% lift in spending.
On Tuesday, the Standard & Poor’s/Case-Shiller home price index is released together with consumer confidence and more surveys covering Chicago and Dallas. And on Wednesday data on car sales is released alongside the ADP national employment index and the ISM manufacturing index. Economists tip firmer results, which should buoy investor sentiment.
On Thursday productivity data is released together with the Challenger job layoffs series while the pivotal jobs data (non-farm payrolls) is released together with the ISM services reading. Economists tip a solid 185,000 lift in private payrolls while the ISM index is expected to lift from 52.6 to 53.2. Any reading above 50 is a positive outcome so investors may have further scope for optimism.
Also of note in the coming week, the European Union summit is held on Monday while in the US the Congressional Budget Office presents its latest budget outlook. Federal Reserve district president Charles Plosser delivers a speech on Wednesday with fellow president Richard Fisher to front the lectern on Thursday. There are debt auctions in Italy and France on Monday with Portugal and Germany to follow on Wednesday.
Sharemarket, interest rates, currencies and commodities
The US profit-reporting season continues in the coming week but many of the major household names have already reported. Broadly the season has progressed well with US sharemarkets drifting higher. However the positive trend has been assisted by firmer US and European economic data and the absence of negative developments on the European Debt Crisis. But US profit results certainly haven’t shot the lights out – only 58% of results have beaten expectations so far, short of the 70% historic average.
In Australia the profit-reporting season has just got under way with around 20 companies issuing their results. Investors have been warned by companies and analysts alike not to expect stellar results, especially those companies dependent on consumer spending. Navitas is amongst those expected to report on Tuesday with Energy Resources on Wednesday, Resource Generation on Thursday with Royal Wolf expected to report on Friday.
After the inflation data, traders are less convinced that the Reserve Bank will cut rates on February 7. Before the inflation data was released the chances of a rate cut were put at around 88%, but following the data a rate cut is considered a 66% chance. Traders still expect rates to fall in coming months with two rate cuts, each of 25 basis points, fully price in over the coming nine months.
Chocolate lovers have experienced better times over the past year with cocoa prices plunging from multi-year highs together with the price of sugar. In March last year the cocoa price hit the highest levels since 1978. But over the nine months to December the price of cocoa plunged by almost 50%. At the same time the sugar price slid by 27% translating to lower chocolate prices. As noted above, the price of chocolates, lollies and other snack foods recorded the smallest annual price increase in 22 years in the December quarter. But the bad news is that cocoa prices are rising again, up 25% over the past six months.
Craig James is chief economist at CommSec.