RBA Deputy Governor Guy Debelle spoke on Inflation. He looked at the trends, and also the segmental breakup. We will look at the first part of the speech where he discussed the overview and then dive into the housing related elements.
We continue to hold the view that the official measure has very little to do with the real exp[experience of many households.
The inflation rate is currently just over 2 per cent (Graph 1). This is consistent with the inflation target for the Reserve Bank agreed between the Governor and the Treasurer. However, that follows a period where inflation has been a little below target for a number of quarters. While inflation has averaged 2½ per cent since the inflation target was introduced, over the past three years it has averaged 1.8 per cent (Table 1).
Graph 1
How broad based has the recent decline in inflation been? In 2016, only around one-quarter of the CPI basket had an inflation rate of above 2.5 per cent. In the June quarter this had risen but only to 40 per cent. To look at it another way, in recent quarters around 80 per cent of the basket had an inflation rate below its inflation-targeting average (Graph 2).
Graph 2
There are a number of macroeconomic forces at work that have contributed to these outcomes, but today I am going to focus on some of the individual price developments that underpin the aggregate inflation outcome. I will examine pricing dynamics at a more disaggregated level and how these dynamics have changed in recent years. An understanding of these changing dynamics and what might be behind them is useful in assessing the outlook for inflation. Important drivers of recent lower outcomes include competition in the retail sector, historically low increases in rents, low wages growth and slower growth in some administered prices.
Table 1: Inflation by Component(a)
Effective weight
Average since 1993
Average since 2015
Retail
30
1.2
−0.1
Consumer durables(b)
15
0.1
−0.8
Food(c)
7
2.4
−0.1
Fruit and vegetables
2
3.2
1.1
Alcoholic drinks
4
2.7
1.6
Non-alcoholic drinks
1
2.3
−0.5
AVC and telecommunications equipment
4
−2.8
−4.7
Housing(d)
17
3.0
1.9
New dwelling purchase
8
3.5
2.8
Rents
7
2.9
0.7
Dwelling maintenance and repair
2
2.2
2.2
Administered prices
19
4.4
3.8
Utilities
4
4.5
4.2
Education
4
5.1
3.2
Health
5
4.3
4.0
Other administered
5
4.0
3.6
Market services(e)
18
2.9
2.0
Tobacco
3
8.4
13.9
Automotive fuel
3
3.3
6.7
Holiday travel and accommodation
6
2.2
0.8
Headline CPI(f)
100
2.5
1.8
Trimmed mean(f)
70
2.6
1.8
(a) Adjusted for the tax changes of 1999-2000
(b) Excludes audio, visual and computing equipment
(c) Excludes fruit, vegetables, meals out and takeaway food
(d) Excludes administered prices
(e) Excludes domestic travel and telecommunications equipment and services
(f) Excludes interest charges and indirect deposit and loan facilities
Sources: ABS; RBA
Housing
The cost of housing services has a large weight in the CPI, with the weight about equally split between the cost of building a new home and the cost of renting (Graph 8). There have been quite divergent dynamics in each of these two components in recent years.
Graph 8
New dwelling costs
New dwelling cost inflation, which has an 8 per cent weight in the CPI basket, has tended to move closely with the residential building cycle over time (Graph 9). However, despite the historically high level of activity in housing construction over recent years, new dwelling cost inflation has been running at a bit below its long-run average. During the late 2000s, new dwelling cost inflation was higher than it is currently because the residential construction sector was competing for materials and labour with the resources sector in the midst of its investment boom. This competition for inputs has clearly abated. Wages growth in housing construction has been generally contained except for some particular skills such as bricklayers, in part because workers have been moving from the resources sector as projects there finished and also reflecting the general slow pace of wages growth in the economy. Reports from liaison suggest that competition for inputs between public infrastructure projects and high-rise residential developments has put some upward pressure on new dwelling cost inflation in Sydney and Melbourne. This includes competition for labour such as engineers and project managers, as well as competition for materials such as concrete. Liaison contacts suggest that firms have also been able to limit cost inflation by switching to lower-cost building materials.
Graph 9
Rents
The pace of rent inflation has been falling since 2008, and year-ended rent inflation is around its lowest level since the mid 1990s. This has been a considerable drag on inflation: rental inflation was nearly 3 percentage points lower per annum in the past three years than in the previous twenty, which has reduced aggregate inflation by nearly 0.2 percentage points per annum in recent years.
The decline in rent inflation can be attributed to a mix of supply and demand side developments. As mentioned, housing construction activity has grown strongly in recent years, which has increased the supply of rental properties. Growth in the housing stock has outstripped population growth since 2014, which put downward pressure on rents. Furthermore, rents are changed relatively infrequently and can be indexed to CPI inflation, so there is a self-reinforcing dynamic to this too.
The national rent inflation series masks considerable variation across capital cities. Rent inflation has been much lower in Perth than in other capital cities in recent years, indeed rents have been falling in Perth at quite a rapid rate for a number of years. The vacancy rate in Perth – that is, the share of properties that are vacant and available to rent – has more than doubled since 2008.
But slower growth in rents is not just a Perth story. Rent inflation in Sydney and Melbourne has slowed considerably in recent years reflecting the substantial additions to the dwelling stock in these cities, and notwithstanding the faster population growth, particularly in Melbourne. Rents are flat in Brisbane and Adelaide. Only in Hobart are rents growing at a high rate.
We expect the pace of rent inflation to increase gradually over the next couple of years. The vacancy rate has declined over the last year, and newly advertised rent growth has increased. However, it will take some time for the flow of new rents to materially affect the stock of rents captured in the CPI.
