Inflation, CPI & Cost Pressures Affecting NFP Demand - CBA

This is the fourth instalment of a regular series of articles by the Commonwealth Bank, who will be using their financial experts to provide news, insight and expert advice for Not for Profit organisations.

Australia’s official inflation rate, reflected in the Consumer Price Index (CPI) is unexpectedly strong and offers a number of important divergences from a Not for Profit perspective according to the Commonwealth Bank.

The headline CPI rose by 0.9% in the June quarter, which took the annual rate up to 3.6%.

Commonwealth Bank economist, James McIntyre says broadly, inflation momentum has turned and underlying inflation was also stronger than expected in the June quarter.

McIntyre says the RBA’s preferred measures of underlying inflation rose 0.9% in the June quarter, and the annual pace jumped from a comfortable 2.3% to a concerning 2.7%. The RBA targets underlying inflation of between 2-3%, so the increase tilts the risks towards further rate rises.

Further rate rises will increase borrowing costs for the one third of households with mortgages. However the CPI figures reveal a range of other cost pressures currently weighing on households.

The total inflation outcome measures a comprehensive basket of households’ purchases. Many of the goods measured in that basket are durables, or long life items which are replaced only infrequently.

Goods such as plasma TVs, furniture, stereos, motor vehicles, household appliances and clothing have been falling in price. The key driver has been the entrance of China into global markets.

China’s large pool of labour has taken up a greater share of global manufacturing, and has sent manufactured goods prices lower.

Purchases of durable goods are infrequent and in some cases can be delayed. Because of the low frequency, Australia is less sensitive to changes in prices compared to more frequently purchased items.

James McIntyre says low frequency items are not the source of cost pressures for households. Inflation in low frequency items has been running at below 2%, and lifted to a 2.1% annual pace in the June quarter. This low rate of inflation is holding down headline inflation. It is masking solid increases in more frequently purchased items.

Inflation for items such as petrol, transport fares, utilities, alcohol and tobacco, and food has been accelerating. In the June quarter, high frequency purchase items rose at a 4.2% annual pace.

He says lower income groups tend to have less capacity to adapt stretched budgets to increases in essential living costs, and continued increases in housing and food price pressures could lead to increased demands for assistance from the Not for Profit sector.

McIntyre says the price of food has been rising strongly, and was running at a 6.1% annual pace in the June quarter thanks in part to soaring banana prices. Households are able to substitute away from bananas, they have to when they’re not available. But there are a range of goods, and particularly services, that struggling households are less able to reduce their consumption of.

Rents and utilities in particular are two examples. Housing rents have been rising at nearly double the pace of the RBA’s 2-3% target range for some time. There has been some moderation following the GFC. But rental inflation continues at a 4.5% annual pace. Data from the Census and a range of household surveys reveals that lower income cohorts dominate rental markets.

Rising utilities costs further highlight the challenge. Annual inflation for electricity, gas, water and sewerage was running at close to 14% in the June quarter.

One of the highest profile items in the CPI is automotive fuel. Petrol costs have been rising strongly.

CBA tracking of domestic petrol prices suggests that the price per litre has risen around 17% since September 2010. Whilst the national average price looks to have stabilised at around $1.40 per litre, it is at a high enough level to still be a drain on struggling households. 

Keep up-to-date with all the latest NFP Finance News from the Commonwealth Bank at probonoaustralia.com.au/news/commonwealthfinance

Disclaimer: Important Disclosures and analyst certifications regarding subject companies are in the Disclosure and Disclaimer Appendix of this document and at www.research.commbank.com.au. This report is published, approved and distributed by Commonwealth Bank of Australia ABN 48 123 123 124 AFSL 234945.