ReadWrite-grogsgamut

My Guardian Post today is on the wages breakout claims by Eric Abetz.

I’m putting some graphs here because they couldn’t all fit in the post.

Today the June Quarter CPI figures came out showing that inflation had increased by 0.4% in that quarter and by 2.4% in the past year. In seasonally adjusted terms the figures are 0.5% and 2.3% respectively.

Before we get to the nitty gritty, lets look at the long term:

Clearly the back of inflation has been broken, to borrow Keating’s term. But just because 10% inflation is a thing of the past, doesn’t mean it’s of no concern. But let’s look at the past 10 years.

It is pretty much right in the middle of the sweet spot. But looks are a bit deceiving. As you can see, the past 4 quarters have been rather a bit higher than the previous couple.The reason for the slight jump up in prices in the September 2012 quarter, is of course, the carbon price.

The impact of the carbon price is pretty obvious when we look at the quarterly changes:

What is also noticeable is that the three quarters since the carbon price has come in have been quite low. And as this is the last quarter which will include the September 2012 figures in the annual amount, next month should see a pretty big drop.

A good idea of what we’re going to see, can be shown if we look at the 9 monthly change in inflation, as the latest amount does not include the Sept 2012 figures:

A drop from 2% to 1%. For the next CPI figure to have inflation running at over 2% it would need the September quarter to rise by around 0.9%-1.0%. Now that certainly could happen, but I wouldn’t bet on it.

OK what about the “underlying inflation”. How did it all go on the RBA’s measures of Trimmed Mean and Weighted Median?

Well the Trimmed Mean clocked in at 0.5% and the weighted median at 0.7%

If we look at the annual rises, the weighted median (which as a rule is the higher figure) sits at 2.6% and the trimmed mean at an oh so low 2.2%.

So going by these figures alone, you would not think the RBA would be worrying about cutting rates. But the figures were slightly above what the market was expecting and sot he Aussie Dollar took off. Soon after however the latest China PMI data came out with a score of 47.7 that was well below what the market was expecting, and so woosh down went the dollar.

The market is now pricing in a 62% chance of the RBA cutting rates. A little bit down on where it was two days ago. But in the past couple hors, the dollar has dropped another half a cent, so I would suggest the expectation of a rate cut is growing.

In my Guardian post yesterday I noted the importance of the tradeables and non-tradeables.

Today we saw the quarterly growth for tradeable commodities increase by 0.3% and non-tradeables go up by 0.5%.

In annual terms it comes in at  minus 0.7% for those goods where the price is largely determined overseas, and 4.3% for the non-tradeable ones:

In the next quarter the fall of the dollar will truly start to flow through, so we will likely see the influence of tradeable goods and services having a positive impact on the CPI. But as the non-tradeable level also includes that impact fo the carbon price (non-tradeables rose by 1.8% in the September quarter, it might balance out). We shall see.

Speaking of carbon pricing, the June quarter saw the price of electricity fall:

Now this is no shock. Electricity prices always fall in the June quarter because its the quarter during which people stop using air conditioners.

But the fall in the past 3 months was the third smallest drop in the past 10 June quarters:

It all flows through to an annual increase of 17.2%

But again, as is pretty obvious, the annual rate in the past 4 quarters have all been affected by the introduction of the carbon price. If we look again at the past 9 months we see a pretty stark picture emerges – a rise smaller than occurred in the 9 months to June 2012, June 2011 and June 2010, and all other Junes back to June 2007.:

The main contributors to the overall CPI was men’s and children’s clothing, tobacco and medical and health expenses.

Housing was also a contributor, so let’s look at housing prices (owner occupied), because the RBA will definitely be taking a close look

Quite a nice little rise. The interest rate cuts certainly seem to be flowing through.

I had a bit of a look at Canberra, because given the cuts to the APS and also the rumoured cuts should the LNP win, I wondered if the prices were falling (note this includes rents).

It seems not, and certainly not like what happened after the 1996 election. It seems

I wondered about Perth as well, to see if signs of the mining boom ending were happening there:

Not so much in the housing sector.

So will the RBA cut rates? I don’t these figures will force them one way or the other. I don’t think there’s much worry about rising inflation, so if anything these figures don’t put a halt on any plan to cut them. I still think they are a chance to see what happens in September once the flow through of the drop in the dollar occurs. Especially when you look at the automotive fuel price changes, which showed a decline in prices in the past 12 months. But it is obvious to anyone who owns a car, that the fall of the dollar in May and June has had an impact of petrol prices, so expect to see this jump next quarter:

The CPI figures for the March quarter were released today by the ABS, showing a next to nothing change of 0.1% in seasonally adjusted terms (0.4% in the original data, if you like that sort of thing). This means in annual terms the rise was 2.5% or smack bang right in the middle of the RBA’s 2-3% band.

OK First the long term view:

Now let’s look at the past 10 years, and now we’ll convert to seasonally adjusted (the seasonally adjusted data only goes back to 1986):

It’s worth noting that the average inflation in that time is 2.8%, and if we go back 20 years it is 2.7%. So prices are increases slower than average. But it’s not surprising that the annual rate increased over the last period because the last period included the March 2012 quarter which actually had negative growth – ie deflation.

Even still, in quarterly changes it is a mere 0.1% which looks like this:

Now we all know the Reserve Bank looks at the Weighted Median and Trimmed Mean versions, so how do they look?

Again even though the quarterly changes are rather sharp and jagged, you can still see how low inflation is running.

The picture becomes even clearer when we go to the annual growth:

So what does it mean for interest rates? Well the 2.2% trimmed mean and 2.6% weighted median won’t have them worrying about increasing rates to curb inflation, and even if we “annualise” the quarterly increase we’re only looking at 2.0% of a weighted median and 1.2% on the trimmed mean rate. That is seriously low.

In short inflation is not a problem despite suggestions the rate cuts last year would send prices souring given the economy was running at trend. Why didn’t this happen? Mostly because the economy might have been running at trend, but it sure wasn’t when the RBA started cutting rates, and also there is a lot of spare capacity in the market, and also that high Aussie dollar is keeping import prices in check (see below).

Now I know this must be a shock to those who thought the the carbon tax would unleash the hell of inflation upon us. After all someone who has claims on being Prime Minister keeps telling us that the carbon price will cause prices to go up and up (“and that’s just for starters”).

So let’s look at electricity:

First annual terms:

Clearly a big boom occured in the September 2012 quarter. But what’s happened since? Let’s go to the quarterly measures:

In the March Quarter there was a 2.4% in crease in electricity, well down from the 15.3% one in the September quarter last year which took the brunt of the carbon tax changes.

But is 2.4% a big increase? The problem with the ABS data on individual sectors is that it is not adjusted for seasonal variances, so let’s just look at the March Quarters to see if we can get any sense of whether 2.4% is a big jump for that time of year:

It’s actually the lowest quarterly increase in a March Quarter since 2007.

It’s also worth remembering that electricity prices only account for about 2% of the basket of goods that are used to collate the CPI. For context, Take Way food accounts for 2.62% and Tobacco accounts for 2.32%.

If you exclude alcohol and tobacco from the data, the CPI quarterly increase falls from 0.4% to 0.2%. If you exclude Housing (of which electricity is around 9%) then the CPI would have risen by only 0.1%.

Here is the CPI excluding a few elements (so the lower it is the bigger the rise of that element):

The big impacts were housing, insurance and financial services; and housing in general. Education also saw a big jump (not surprisingly given it’s the start of the school year.

But let’s look at annual price increases and get it down to more detailed categories. Don’t worry about the weightings of each of these, but here are the top 20 and they might be of interest if you think you’re rather different to the “average household” and you consume a lot more poultry than most. Electricity and Gas are not surprisingly right up the top:

And the bottom 20? Not surprisingly lots of stuff that gets imported fell in prices. As did Lamb and goat, which given Barnaby Joyce suggested the carbon tax would lead to $100 lamb roasts seems rather interesting

And so the first lot of inflation figures since the introduction of the carbon price came out today, showing in the September quarter inflation had gone up 1.4%, for an annual rise of 2.0%. In seasonally adjusted terms it was even better – a 1.2% quarterly rise, with the same 2.0% annual rise.

Now normally figures showing a mere 2.0% annual inflation would have people laughing in the streets about the wonderful low price rising country we live in, but because of the carbon price these figures have caused many to scratch their chins and mutter “hmmm…”

First off let’s get some perspective:

Sure it’s 63 year’s worth of perspective, but I just want to reassure you all that we’re not exactly in hyperinflation territory. In fact we’re still at 2.0% right at the bottom of the RBA’s target of 2-3%. THE BOTTOM

So maybe we need a bit of a grip when we read thing like this from the Liberal Party:

These figures clearly show the impact the Carbon Tax is having on everyone across Australia.  The  things people need most like electricity, gas, education, rent, childcare and water are rising hitting the hip pockets of families, businesses, seniors and pensioners.

Now the Liberal Party is right (in part) when it talks about the rise in electricity prices (I’ll get to those later), but when it starts talking about “things people need”, well it’s not really being specific because the CPI covers the whole gamut (if you will) of things we need. And that whole gamut says annual inflation rose 2.0% over the past year – that’s a figure worth celebrating.

Let’s look closer – first the annual rate of the CPI over the past 7 years:

And now the quarterly changes over the same period (seasonally adjusted):

So annually things are fine but yep a big jump in the last quarter. And of course the carbon price is to blame. Treasury had predicted a hit of 0.7% due to the carbon price. Take that out and we’re back at either 0.7% non adjusted or 0.5% seasonally adjusted – or once again in very low inflation territory.

The big jump was in electricity (15.3%), gas and other household fuels (14.2%). Clearly these jumps were going to happen due to the impact of the carbon price. But how much? If you’re Joe Hockey, you’ll lay it all on the carbon price:

The ABS has found the largest price increases since the last CPI figures were released were electricity prices which have seen a 15.3% rise with household gas and miscellaneous fuels seeing a 14.2% rise.

Well yes that is true:

You would almost think that in the past quarter it was as if the government introduced something that meant gas and electricity suppliers were being charged for something that they had until then never been charged for… gee wonder what that is…

But first we need to realise that this was not a shock – in fact in June it was announced that NSW electricity prices would increase by around 18%, and gas prices would go up by between 9% and 15%. So there’s no surprise to any of this.

And remember as well that when those increases were announced only around 49% of that 18% rise was attributed to the carbon tax.

Some commentators have made a big deal about the rise for electricity being 15.3% when the Treasury (beware big pdf file) had suggested the one off hit from the carbon price would only be 10% for electricity and 9% for gas. But given 49% of 15.3% is around 7.5%, you could suggest that Treasury was overly cautious.

But one thing about the ABS data on sub groups such as these is that it is not seasonally adjusted – and the September quarter is often the biggest quarterly jump in price of the year (and the June one usually the smallest). Possum noted on Twitter that one way to look through the massive ups and downs of the original unadjusted data was to compare the increase in electricity prices in previous September quarter to gauge what we would normally expect such rises to be:

So – assuming the difference in the increases are due only to the carbon price – it looks like the Treasury estimates were under for gas by 2% and over for electricity by 1.5%. But again remember not all of those price increases are due to the carbon price. Even if we suggest 50% of the rise is due to the carbon price (ie more than was the case in NSW) then the September quarterly jump is just 7.65% and is only a mere 0.85 percentage points above the 5 years average September quarter price jump for electricity.

Bear in mind this is a very unscientific way to examine the impact of the carbon price – and we’ll need to look at the next couple quarters to get a fuller picture, but it gives at least some sense of the picture. I wouldn’t bother doing it for all areas – eg fruit and vegetable where there are so many other variables at play – namely the weather.

But let’s get down to what everyone really care about inflation – the impact on interest rates.

And in annual terms:

or for a close look – the past 2 years only:

Given these are the measures the RBA focuses on, there’s not a lot here to suggest we need to panic about inflation.

The only aspect I think that might get the RBA to pause and not cut rates on Cup Day is that given the past 6 months has seen a combined 1.5% increase in the weighted median and a 1.3% rise in the trimmed mean the RBA might think that annualizes out to around the 3.0% – ie a the top on the band and thus decide it is best to wait and see what the December quarter holds before cutting the rates. But the market doesn’t seem to think that is likely – the expectation is still for a cut

On a broader look, the old Misery Index of the Unemployment Rate and Inflation rate added together shows we’re still in very good territory historically (I use the trimmed mean for inflation)

The level at the moment is 7.8, and as you can see, being under 8 is pretty much an anomaly. We are experiencing odd low unemployment and low inflation at the same time. With unemployment expected to tick up slightly, right now I’m still betting the RBA will drop rates in November. 

But then I rarely get things right on Cup Day…