Inflation is stabilising, consumers are reining in their spending and the strong job market is showing signs of weakening.
Economically we are kicking a few goals when it comes to inflation. This week’s monthly Consumer Price Index for August was in line with economist forecasts and steady at 5.6 per cent – still well above the Reserve Bank’s 2-3 per cent target band – but there are some good signs when you look at the detail.
In fact, the vast majority of economists now believe the RBA will keep rates on hold again next month. Over the last four months the average annualised inflation rate was 3.9 per cent and has been 3-4 per cent for the last five months.
Key trends of individual cost areas of inflation
But remember that 5.6 per cent August result excludes volatile items. So let’s go through the details of the key individual cost areas of inflation and some of the trends.
The largest contributor to inflation in August was understandably petrol prices. Rising global oil prices above $US90 a barrel and a falling Australian dollar has been a double whammy for fuel prices. As a result fuel rose 9.1 per cent in August.
Food, alcohol, and housing costs were the other big inflation drivers. Restaurant meals rose by 2 per cent over the quarter and takeaway and fast foods rose by 2.1 per cent. The Fair Work Commission’s 5.75 per cent minimum wage increase would have played into this, even though food prices would have fallen.
Fruit costs dropped 2.9 per cent for the month and vegetables dropped 0.1 per cent. Improved growing conditions have increased supply and led to lower prices. Prices of lamb continued to decline, while other meat and seafood prices rose further in the month.
There was a 2.4 per cent increase in beer prices, with smaller increases for wine and spirits. An increase in the alcohol excise from indexation contributed to the rise.
The housing group of the CPI basket (which accounts for just over one fifth of the CPI basket) was driven by a 0.7 per cent rise in rents for the month. Rents are now 7.8 per cent higher over the year.
The costs of building new houses continued to ease to an annual 7.8 per cent – the lowest since August 2021.
Electricity inflation costs fell by 1.3 per cent because of the Government’s energy rebates. Government rebates are only delaying the 20 per cent increase in electricity prices.
Travel prices fell by 3.9 per cent in August, well down on the 17.7 per cent in June. Domestic airfares fell in August owing to the lack of school holidays, which happen in September. Travel price declines in the month subtracted around 0.2 percentage points from inflation.
Other key trends
Insurance prices rose by 2.8 per cent for the quarter; over the year, insurance prices are now 14.7 per cent higher.
Car fees (rego, licence and parking fees plus tolls) rose by 3.2 per cent over the quarter.
Even though telecommunications prices have fallen by nearly 30 per cent since 2013, they increased 0.5 per cent in July and 1.7 per cent in August – remember, Telstra lifted mobile prices 7.5 per cent on 1 July because of “inflation”.
Inflation heading in right direction, but what about consumers?
With inflation going okay, what about the other RBA concern: Australian consumers? According to yesterday’s retail sales data, Aussies are staying in the bunker and not spending up big. Which is exactly what the RB A wants.
Retail trade rose 0.2 per cent in August, up just 1.5 per cent over the year despite inflation above 5 per cent and a huge rise in population because of migration. It is the slowest trend in retail sales since 1982.
We seem to be cutting back on big ticket items for the house but spending on experiences/rewards like eating out. Spending on cafés, restaurants and takeaway rose 8 per cent over the year, followed by clothing and sports goods (inspired by the FIFA Women’s World Cup!).
But household goods spending was 0.4 per cent lower in the month and 6.6 per cent down for the year. Food retailing, which accounts for close to 40 per cent of total retail sales, fell 0.3 per cent.
The strong job market is showing signs of weakening
After inflation and consumer spending, the third concern for the RBA when assessing interest rates is the strong job market pushing up wages and feeding into inflation.
Unemployment is still low, but job vacancies fell by 8.9 per cent over the three months to August – the fifth consecutive quarterly decline in the number of job vacancies. Since the peak in May 2022, where there were 476,900 job vacancies (more than the number of people officially unemployed), there has been a 22 per cent decline, or an 86,500 reduction in vacant jobs.
The quarterly movements in job vacancies varies. There are lots of jobs on offer in retail trade (up 19.6 per cent for the quarter), arts & recreation services (+12.3 per cent), and manufacturing (+11.1 per cent).
In contrast, there were very large declines in financial & insurance services ( 15.7 per cent), construction ( 13 per cent), other services ( 11.8 per cent), admin & support services ( 11.5 per cent) and transport, postal & warehousing ( 9.7 per cent).
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