Monthly economic e-news – November 2019
18 November 2019
By Craig Turnbull
Chief Investment Officer
Number of factors keeping a lid on the inflation rate
The latest inflation figures released by the Australian Bureau of Statistics (ABS) reveal that a number of factors including the drought, the lower Australian dollar, and higher taxes, are all having an impact on our cost of living.
Overall the inflation rate remains low with the headline CPI rate for the September quarter rising slightly to 0.5%, nudging the annual CPI rate up to just 1.7%.
Source: Trading Economics, ABS
What’s costing more?
There’s evidence that the drought is now starting to have an impact on prices with the cost of food and non-alcoholic beverages rising by 0.4% in the September quarter.
Many groceries are becoming more expensive with meat and seafood prices increasing by 1.7%, dairy products up 2.2% on top of a 1.3% rise for bread and cereal products.
The Australian dollar fell more than 4% during the September quarter and this pushed up the prices of many imports including clothing and footwear. Women in particular are now paying an additional 1.4% for imported clothing.
More Australians may have been encouraged to holiday at home with the combination of the lower dollar and the peak travel season in the northern hemisphere driving up the cost of international travel and accommodation by 6.1%.
In September, smokers were given another reason to quit with a 12.5% rise in the federal excise tax pushing up the price of tobacco products by 3.4% in the quarter, contributing to the 15.1% rise over the last 12 months.
Other household costs to rise over the quarter included child care (up 2.5%), property rates and charges (up 2.5%) as well as water and sewerage (up 2.3%).
What’s keeping inflation down?
While consumers have seen some price rises over the September quarter, there have been falls across a range of essential products and services.
Households benefited from a 0.7% drop in the price of electricity following the introduction of the Default Market Offer and the Victorian Default Offer that replaced the standing offers for electricity in our east coast capital cities.
During the quarter, falls in the global oil price flowed through to consumers with a 2% decrease in the price of petrol. However, global prices did spike again after the September attack on oil processing facilities in Saudi Arabia.
The listing of more products on the Pharmaceutical Benefits Scheme reduced out-of-pocket expenses for consumers by 1.0% but the cost of medical and hospital services has continued to rise over the last 12 months.
The oversupply of housing, particularly apartments, in some of major cities has also helped to keep a lid on the CPI figure.
Rent and new home purchases traditionally contribute around 15% of the inflation figure but an oversupply of housing means rents were only up 0.1% in the September quarter, with the annual growth in Sydney now the lowest on record.
So what does low inflation mean for the economy?
While many individual factors influence the inflation rate, it’s evident that low consumer confidence and weak retail spending are also keeping a lid on prices.
It may be good news for consumers in the short term but if prices stay too low for too long it’s usually a sign of a weakening economy.
The Reserve Bank has already cut rates to historic lows and many fear that further cuts may actually erode confidence by making people more nervous about the future and less willing to loosen the purse strings.
That’s why the calls for the federal and state governments to open their wallets and provide more direct stimulus to the economy are becoming louder and louder.
Markets at a glance
for the month ending 31 October 2019
Australian shares1 down by 0.35%
Australian Government Bonds yield2 up to 1.130%
Australian dollar up to US$0.6926
Cash rate3 down to 0.75%*
International shares4 up by 2.47%
1 ASX 200 Accumulation Index
2 Yield on 10 year Australian Government Bonds
3 RBA cash rate
4 MSCI – World ex Australia (USD)