Low inflation keeps door open for RBA on interest rates

The Australian Bureau of Statistics (ABS) released the Consumer Price Index figures for the first quarter of 2013 earlier this week.  The figures, which measure inflation, showed an increase of 0.4% over the quarter following a 0.2% rise over the December 2012 quarter.  Based on data over the past six months, annual inflation is currently running at 1.2% which is well below the Reserve Bank’s target range of 2% to 3%.

The RBA prefers to look at measures of underlying or ‘core’ inflation which strip out some of the more volatile measures such as some agricultural products and fuel prices.  Underlying inflation is measured via the trimmed median or weighted mean CPI measures.  Over the quarter, both measures were slightly stronger than headline inflation, recorded at 0.6% and 0.5% respectively.

CPI over time

Over the 12 months to March 2013, headline inflation was recorded at 2.5% while the underlying measures were recorded at 2.2% for the trimmed mean and 2.6% for the weighted median.  All inflation measures show that annual inflation currently sits at the lower to middle range of the RBA’s target range for inflation.

The CPI calculation is made up by measuring the change in the cost of a basket of goods. These 11 ‘components’ make up the headline CPI reading and they include a number of sub-groups that make up their overall value.  Over the 12 months to March 2013, costs associated with: health (6.1%), education (5.8%), housing (5.1%), alcohol and tobacco (3.7%) and insurance and financial services (2.9%) recorded the greatest increases.  On the other hand, clothing and footwear (-1.5%) and recreation and culture (-0.5%) costs fell while furnishings and household equipment (0.6%), transport (1.4%), communication (1.5%) and food and non-alcoholic beverages (1.6%) recorded low levels of increases.

Components of CPI

The housing component of CPI provides the greatest contribution to the overall CPI result, with an overall weighting of 22.3%.  As mentioned, housing costs have increased by 5.1% over the year which is a much greater increase than the 2.5% increase in headline inflation.  Electricity (17.1%), gas and other household fuels (16.8%), utilities (13.5%) and property rates and charges (5.8%) costs have all increased by more than the growth in the overall housing component.  No housing sub-group has recorded a fall in CPI over the year however, water and sewerage costs have risen by the lowest percentage at just 2.6%.  Annual growth in new dwelling purchases by owner occupiers and maintenance and repair of the dwelling (both 2.8%), rents (3.5%) and other housing (3.9%) have each been much lower than the headline figure for the housing component of CPI.

Housing components of CPI

The ongoing trend we have noted for a number of years now is that it is not the cost of the mortgage or rents which have been climbing sharply; rather it is the cost of those regular gas, rate and electricity bills which are continually increasing.  Electricity costs have risen at an average annual rate of 8.3% over the past 10 years, followed by utilities (8.0%pa), water and sewerage (7.6%pa) and gas and other household fuels (7.2%pa).   On the other hand, maintenance and repair of the dwelling cost have increased by 2.6% annually over the decade followed by; new dwelling purchase by owner occupiers (3.5%pa), other housing (3.7%pa) and rents (4.4%pa).

10 yr chanmge in housing components of CPI

Overall the data indicates that inflation in the Australian economy remains at low levels and that the calls for interest rate hikes will likely now dissipate.  In fact, with home value growth slowing in April, commodity prices falling and mining investment expecting to peak throughout 2013 there may be a need for further interest rate cuts this year.  Specifically for housing, the data shows that the growth in those regular quarterly household bills has gotten out of hand to some extent over the past decade and certain costs continue to grow significantly each year.  Cost escalation associated with house purchases and rentals although above headline inflation are quite contained relative to other housing costs.

About Cameron Kusher

Cameron Kusher is Head of Research at CoreLogic, specialising in primary and secondary data analysis, property market commentary and consultancy. Cameron has a thorough understanding of the fundamentals such as demographics, trends, economics and spacial analysis and is a regular keynote speaker for property-related groups, regulated industry bodies, corporations and the government sectors. Follow Cameron on Twitter @cmkusher

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