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We look at the latest data on inflation from the ABS – there are some important moving parts, which MSM are not covering at all well.
Go to the Walk The World Universe at https://walktheworld.com.au/
We look at the latest data on inflation from the ABS – there are some important moving parts, which MSM are not covering at all well.
Go to the Walk The World Universe at https://walktheworld.com.au/
We look at the latest from the ABS. The drought and lower dollar is not helping.
What will the RBA do?
https://www.abs.gov.au/AUSSTATS/abs@.nsf/DetailsPage/6401.0Dec%202019?OpenDocument
We look at the latest from the ABS. The drought and lower dollar is not helping.
What will the RBA do?
We examine the latest ABS CPI data – but how believable is it?
We examine the latest ABS CPI data – but how believable is it?
The Consumer Price Index (CPI) rose 0.5 per cent in the September 2019 quarter, according to the latest Australian Bureau of Statistics (ABS) figures. This follows a rise of 0.6 per cent in the June 2019 quarter.
All groups CPI seasonally adjusted rose 0.3%.
The trimmed mean rose 0.4%, following a rise of 0.4% in the June 2019 quarter. Over the twelve months to the September 2019 quarter, the trimmed mean rose 1.6%, following a rise of 1.6% over the twelve months to the June 2019 quarter.
The weighted median rose 0.3%, following a rise of 0.4% in the June 2019 quarter. Over the twelve months, the weighted median rose 1.2%, following a rise of 1.3% over the twelve months to the June 2019 quarter.
This is well below the RBA target.
The most significant price rises in the September 2019 quarter were international holiday, travel and accommodation (+6.1 per cent), tobacco (+3.4 per cent), property rates and charges (+2.5 per cent) and child care (+2.5 per cent).
The most significant price falls this quarter were automotive fuel (-2.0 per cent), fruit (-3.1 per cent) and vegetables (-2.5 per cent).
ABS Chief Economist, Bruce Hockman said: “Despite the price falls for fruit and vegetables this quarter, the drought is impacting on the prices for a range of food products. Prices rose this quarter for meat and seafood (+1.7 per cent), dairy and related products (+2.2 per cent) and bread and cereal products (+1.3 per cent).”
The CPI rose 1.7 per cent through the year to the September 2019 quarter. This follows a through the year rise of 1.6 per cent to the June 2019 quarter.
“Annual inflation remains subdued partly due to price rises for housing related expenses remaining low, and in some cases falling in annual terms. Prices for utilities (-0.3 per cent) and new dwelling purchase by owner-occupiers (-0.1 per cent) both fell slightly through the year to the September 2019 quarter, while rents (0.4 per cent) recorded only a small rise,” said Mr Hockman.
Main contributors by city:
Sydney (+0.5%)
The rise was partially offset by:
Melbourne (+0.5%)
The rise was partially offset by:
Brisbane (+0.6%)
The rise was partially offset by:
Adelaide (+0.7%)
The rise was partially offset by:
Perth (+0.5%)
The rise was partially offset by:
Hobart (+0.5%)
The rise was partially offset by:
Darwin (+0.3%)
The rise was partially offset by:
Canberra (+0.7%)
The rise was partially offset by:
The annual average retail petrol price in 2018–19 was the highest in real terms (i.e. adjusted for inflation) in four years according to the ACCC’s latest report on the Australian petroleum market for June quarter 2019.
The report shows that in the five largest cities, Sydney, Melbourne, Brisbane, Adelaide and Perth, the average annual petrol price in 2018–19 was 141.2 cents per litre (cpl), nearly 7.0 cpl higher than last year. In nominal terms (i.e. with prices not adjusted for inflation) it was the highest annual average price in five years.
Annual average retail petrol prices in the five largest cities in nominal and real terms: 2000–01 to 2018–19
“The most significant contributor to this increase was the depreciation over the year in the AUD-USD exchange rate, which decreased by USD 0.06 to USD 0.72,” said ACCC Chair Rod Sims.
“This was the lowest annual average AUD-USD exchange rate in the last 15 years. The AUD–USD exchange rate is a significant determinant of Australia’s retail petrol prices because international refined petrol is bought and sold in US dollars in global markets.”
A significant development in the petrol industry in the first half of 2019 has been the change in price setter at both Coles Express, to Viva Energy, and Woolworths, to EG Group, retail sites.
The report found that compared with market average prices, Coles Express prices were lower in most capital cities after Viva Energy began setting prices. However, they remained above the market average price in all eight capital cities. At Woolworths, prices were higher in most capital cities after EG Group took over the retail sites, although in the majority of cities, prices were still below the market average price.
“The ACCC will monitor prices at these retail sites very closely in future,” Mr Sims said.
Mr Sims said it was important for motorists to shop around for cheap fuel by using the available fuel price websites and apps. For those motorists in the five largest cities, they can also use information about petrol price cycles on the ACCC website to time their purchases.
Retail petrol prices in the three smaller capital cities; Canberra, Hobart and Darwin, are typically higher than prices in the five largest cities. However, the report noted that, in the first half of 2019, there were periods when prices in Darwin and Canberra were below prices in the five largest cities.
Monthly average retail prices in Darwin were lower than in the five largest cities between February and May 2019, and monthly average retail prices in Canberra were lower than in the five largest cities in both April and May 2019.
“This was the first time monthly average prices in Canberra were below the average price in the five largest cities since April 2012,” Mr Sims said. “The reduction in prices in the Darwin and Canberra is good news for motorists in those locations.”
The lower prices in Canberra may have been influenced by the possibility of greater regulation of the petroleum industry arising from the current ACT Legislative Assembly petrol inquiry. The situation in Canberra is similar to that in Darwin in 2015, when the decrease in petrol prices coincided with increased local scrutiny of petrol prices by the NT Government.
The report noted that in the June quarter 2019, average retail petrol prices across the five largest cities were 145.3 cpl, an increase of 15.0 cpl from the March quarter 2019. The principal driver of the increase was rising international crude oil and refined petrol prices in the quarter. These continue to be influenced by the agreements made since late-2016 by the Organisation of Petroleum Exporting Countries (OPEC) cartel, and some other crude oil producing countries, including Russia, to cut production.
Other petrol fast facts:
The Consumer Price Index (CPI) rose 0.6 per cent in the June quarter 2019, according to the latest Australian Bureau of Statistics (ABS) figures. This follows no movement (0.0 per cent) in the March quarter 2019.
The most significant price rises in the June quarter 2019 were automotive fuel (+10.2 per cent), medical and hospital services (+2.6 per cent), international holiday travel and accommodation (+2.7 per cent) and tobacco (+2.4 per cent).
Prices for fruit and vegetables (-2.8 per cent), domestic holiday travel and accommodation (-1.5 per cent) and electricity (-1.7 per cent) fell this quarter.
ABS Chief Economist, Bruce Hockman said: “Automotive fuel prices rose 10.2 per cent in the June quarter 2019. This rise had a significant impact on the CPI, contributing half of the 0.6 per cent rise this quarter. Automotive fuel prices returned to levels recorded in late 2018 after falling 8.7 per cent in the March quarter 2019.”
Inflation varied across the major centres. In Sydney we saw a large rise in fuel costs, putting the result in the range being experienced by Perth and Darwin.
Main Positive Contributors
Main Negative Contributors
The CPI rose 1.6 per cent through the year to the June quarter 2019, after increasing 1.3 per cent through the year to the March quarter. Mr Hockman said: “Annual growth in the CPI continues to be subdued due to falls in a number of administered prices. Through the year, utility prices have fallen 0.2 per cent and child care has fallen 7.9 per cent following the introduction of the Child Care Subsidy package in July 2018.”
The “muzzle” on reported inflation has policymakers and analysts perplexed.
As Joseph Carson, former director of economic research at Alliance Bernstein writes in his follow up to a “New Working Theory on Inflation“, numerous economic explanations and theories have been offered, and policymakers are considering making changes to their operating price-targeting framework. Yet, before any decisions are made policymakers should consider all of the factors that could be keeping a “muzzle” on published inflation.
Here are two:
First, a little more than 20 years ago the Bureau of Labor Statistics (BLS) introduced a number of new measurement techniques in the estimation of consumer inflation (see Boskin Commission). So the current business cycle, which started in 2009, is the second consecutive cycle in which these new procedures have been employed.
Statistical changes have been made to account for product substitution, a greater degree of quality changes in products and services and faster introduction of new outlets or ways in which people shop. The introduction of new variables in the estimation of inflation alters the pattern and at various times the rate of change as well.
Prior to their implementation, analysts and government statisticians estimated that the potential reduction in core inflation from all of these statistical changes would range from one-half to a full percentage point. Yet, all of those estimates were looking backwards and there is no guidance from the statistical agencies of the scale of the reduction in reported inflation after implementation.
Odds are high that the impact on reported inflation varies year to year, with some years at the upper end of range of estimate and others at the lower end. Nonetheless, to overlook the impact from changes in measurement would be shortsighted, especially since changes in consumer price of a few tenths of a percent or more do matter a lot when inflation is low, and readings below the 2% target could be misconstrued as a failure of monetary policy, which in turn “forces” the Fed to maintain an unnecessarily easy monetary policy, which results in asset bubbles and wealth inequality, when in fact the only applicable consideration is that the BLS and the Dept of Labor are measuring inflation incorrectly.
Second, research conducted by the Federal Reserve staff has found that the shift in the measurement of shelter costs two decades ago to only use only prices from rental market and exclude those from the owners housing market systematically removed the largest single “driver” of cyclical inflation, while it also simultaneously reduced the volatility in reported inflation.
The significance of these findings has not received as much attention as they should. Removing the largest single driver of cyclical changes in inflation means that reported inflation nowadays does not exhibit the same sensitivity to economic growth and interest rates, as was the case in previous cycles. Accordingly, one of the reasons why the trade-off between changes in unemployment and reported inflation has been so benign in the last 20 years is due to changes in price measurement.
The missed signal from housing inflation was readily apparent in the 2000s when core inflation peaked at a relatively modest 2.5% even though house price increases were recording double-digits increases. In previous business cycles in which house prices recorded gains north of 10% core inflation readings were two or three times higher. In the current cycle, house price increases have run ahead of rent increases, but not to same extent as was the case in the 2000s.
As Carson concludes, these findings strongly suggest that price measurement issues are important to consider when looking at trends in the reported inflation data. For all of the conceptual changes and measurement issues the key question policymakers should be asking is whether the “muzzle” on reported inflation still makes it a useful benchmark for the price-targeting framework. The fact that currently constructed published price measure miss modern day inflation in the asset markets strongly suggests policy may need a new working definition of inflation before they contemplate any changes to the price-target framework.
That’s the theory. Now, courtesy of Bloomberg, here is a dramatic observation of the practical implications of erroneous inflation measurements, which suggests that the US government is under-representing arguably the most important aspect of the consumer price inflation basket, that of food, by as much as 40%.
When Bloomberg’s Cameron Crise encountered the dataset that is used to compute elements of the CPI that is in turn used by the Fed to determine monetary policy (and more often than not, results in asset price bubbles) he decided to compare how this theoretical price compares to real world prices.
Ignoring such volatile series as cell phones or haircut prices, he instead focused on groceries, and specifically cereals and bakery products, “the kind where you can buy the same thing in every grocery store in the country.” He notes that there are six components to this subindex:
Then, to figure out what the real world prices are (i.e. not the “extorionate prices we pay in greater New York”), he signed up for supermarket delivery services in Columbus, Ohio, and Murfreesboro, Tennessee, because “while they may not represent the exact national average, they nevertheless seem like a reasonable proxy for middle America.”
Once the representative middle-America venues had been picked , a selection was made of an identical basket of six goods, converting them to a unit price per pound ala the CPI basket. And while the products chosen “aren’t bargain-basement” value” generics, they aren’t premium foodstuffs either.” The results, as Crise, notes, “were pretty compelling.”
As the table below shows, the CPI is chronically misrepresenting the price of every product in the food basket, with the gap between the government “price” and the average real-world price ranging from 14% in the case of chocolate chip cookies, to as much as 64% for a pound of white bread.
Overall, in the specific case of cereals and bakery goods, the difference between the CPI price for the basket of six core food products, and the average price of the same products in Ohio and Tennessee, is a whopping 39%. This same execrise extended to all other goods and services in the basket would reveal a similar bias to misrepresenting prices to the downside relative to reality.
Here again are the results, represented visually.
The critical problem represented above is that while the Fed believes that the CPI calculation is accurate, and thus Americans can be subject to far looser monetary policy as the FOMC believes they are paying far less, the reality is that monetary conditions have to be far tighter for reality to catch down with the BLS’s woefully incorrect price assumptions.
And keep in mind, the example above represents what middle-America is paying. The prices for these goods along the east or west seaboard would be substantially higher, resulting in a far greater underpricing of reality by the BLS.
As Crise observes: “while there was one instance where the real world cost matches the bureaucratic estimate, for the most part food – or at least this kind of food – is a lot more expensive than the bean counters would have you believe.“
And his conclusion: “perhaps if the Fed wants to see higher inflation, they should just send a few staff economists to the “social Safeway” in Georgetown.”
