Pete Wargent blogspot

CEO AllenWargent Property Buyers, & WargentAdvisory (institutional). 6 x finance author.

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Wednesday, 27 January 2016

Inflation is well under control


There are usually a few different interpretations of the all-important inflation figures knocking around after the data is first released, and today's Consumer Price Index figures for the fourth quarter of 2015 proved to be no exception.

The headline result of 0.4 per cent inflation for the quarter was boosted by the ever-rising price of smokes (up by a wheezing +7.4 per cent following the September 1 tobacco excise sting), and came in slightly above market expectations of 0.3 per cent.

This took the annual headline inflation result to 1.7 per cent. Technically speaking, this may be higher annual inflation than the results we saw in the preceding few quarters, but headline inflation does remain well below the 2 to 3 per cent target range.

There was at least some jolly good news for consumers: the indices for wine (-2.2 per cent) and ladies shoes (-5.7 per cent) were down over the year, while fruit prices ticked down in the quarter too.

On the other hand there were notable increases in the cost of domestic and international holiday travel.

Core inflation under control

More crucially for monetary policy implications, the preferred core or underlying inflation figures came in at 0.5 per cent ("weighted median") and 0.6 per cent ("trimmed mean", which strips out volatile items) respectively, taking the annual results for these readings to 1.9 per cent and 2.1 per cent.

Thus the average of these underlying inflation results for the year to December was 2.0 per cent, at the bottom end of the target range.

Annual underlying inflation has slowed from 2.7 per cent in December 2013, to 2.3 per cent in December 2014, and now to just 2.0 per cent in December 2015. At the very least you can say that there are few strong inflationary pressures here.

Currency markets rather liked this outcome, a Goldilocks result if you will - not too low or any imminent risk of deflation, and not too high either, affording ample scope for further interest rate cuts if they are needed.

Some inflation has been imported

A key point of interest for me was that the non-tradables inflation component - which is a decent enough proxy for price pressures in the domestic economy - sagged to just 2.3 per cent. We have not seen a lower reading on this gauge since before the Sydney Olympics. 

As you can see in the chart below, annual inflation on tradables was up to 0.9 per cent for the year to December, in spite of cheaper petrol prices (there was a huge drop in the oil price last quarter, and petrol prices fell by -5.7 per cent), representing the flowing through impact of the lower Aussie dollar. 

With plenty of slack remaining in the labour force and wages growth subdued, at this juncture it seems pretty unlikely that there will be strong residual inflation after the currency impact has flowed through. 

The wrap

In summary, there does not seem to be great deal of inflationary pressure around, with core inflation just nicely tucked in at the bottom of the 2 to 3 per cent range.

This essentially leaves room for the Reserve Bank to cut interest rates again later in the year should it be deemed that the economy needs further help. For next week's meeting, at least, the cash rate appears certain to remain on hold at 2 per cent.

Finally, the charge is often levelled at me that I focus too much on macro trends instead of providing practical advice to readers.

If that is so, it's because I believe that there are only so many ways to say "spend less than you earn, and invest the difference in property, shares, and setting up your own business".

But, anyway, here are a few pointers for free:

Clearly with the declining dollar now may not be such a great time to be jetting off to Hawaii, so consider instead loading up on a tank of now-cheaper fuel and driving to the Sunshine Coast for a break this spring.

If you're a partial to a smoke, now is definitely a time to consider giving away the gaspers, with excise being levied relentlessly on the habit.

This doesn't all mean that you can't have some fun though: with the price of plonk falling by its largest percentage amount in 34 years and fruit prices also down, you could make yourself a thrifty fruit punch, perhaps even in some inexpensive stilettos, if that's your thing?

Finally, it may at last be a good time to lock in that root canal appointment you've been putting off, with dental services costs rising at their equal slowest rate in well over three decades.